corporate personality - blackwell's · corporate personality lord halsbury lc said, at pp...

5corporate personality

summary of points covered

Introduction• E ̂ects of corporate separate personality• Avoiding e ̂ects of corporate separate • personality

Corporate law theory• Company singular or plural?•

5.1 introductionC e single most important consequence of incorporation is the separate legal personality which the company acquires. By CA 2006, s 15(1), on the registration of a company, the registrar of com-panies is to certify that the company is incorporated. A certiT cate of incorporation given under s 15(1) is conclusive evidence that ‘the requirements of this Act as to registration have been com-plied with’ and that the company is duly registered under the Act (s 15(4)). C us, the company is born and comes into being complete with its own birth certiT cate (see 2.2.2).

More important for present purposes is s 16(2):

C e subscribers to the memorandum, together with such other persons as may from time to time become members of the company, are a body corporate by the name contained in the memorandum.

It is by this provision that a separate legal entity—the body corporate—is created.

5.2 effects of corporate separate personality

5.2.1 salomon’s caseA company has a dual nature as both an association of its members and a person separate from its members. A company’s property is owned by the company as a separate person, not by the mem-bers; the company’s business is conducted by the company as a separate person, not by the mem-bers; it is the company as a separate person that enters into contracts in relation to the company’s business and property.

C e leading case on the fundamental importance of the separate personality of a company is Salomon v A Salomon and Co Ltd [1897] AC 22.

As explained in 2.3.3.2, it was common in the late 19th century for businesses previously con-ducted by sole proprietors or partnerships to be ‘incorporated’: the business would be sold to a

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corporate personality

company whose only members were its previous owner or owners and su= cient nominees to make up the then minimum number of seven members (the minimum number of members of a com-pany is now one). Mr Salomon had conducted his bootmaking business as a sole trader, and he sold it to a company incorporated for the purpose called A Salomon and Co Ltd whose only members were himself, his wife, a daughter and four sons. C ese seven individuals were the subscribers of the company’s memorandum and took one £1 share each. C e business was sold to the company for over £39,000. Part of the purchase price was used by Mr Salomon to subscribe for 20,000 further £1 shares in the company, but £10,000 of the purchase price was not paid by the company, which instead issued Mr Salomon with a series of debentures (written acknowledgements of indebted-ness) for £10,000 and gave him a c oating charge on its assets as security for the debt (c oating charges are explained in 11.6). Unfortunately the company’s business failed and the company went into liquidation. As will be explained in 11.6, the holder of a c oating charge on a company’s assets is entitled, on the liquidation of the company, to have the assets covered by the charge applied to the payment of the debt secured by the charge. If Mr Salomon had been able to enforce his c oating charge, the company’s other creditors would have got nothing. C e company’s liquidator took a stand on behalf of the other creditors, resisted Mr Salomon’s claim and suggested that, rather than take money from his company, Mr Salomon should be made responsible for paying all its debts, just as he would have if he had continued to conduct the business as a sole trader. C e liquidator wanted somehow to ignore the fact that Mr Salomon had sold his business to a separate person, A Salomon and Co Ltd, and that Mr Salomon now had only limited liability to that company instead of the unlimited liability he had when he conducted the business as a sole trader.

At T rst instance (sub nom. Broderip v Salomon [1895] 2 Ch 323), it was held that the com-pany had conducted the business as agent for Mr Salomon, so that he was responsible for all debts incurred in the course of the agency for him. C e House of Lords rejected this approach. Lord Herschell said ([1897] AC 22 at p 43):

In a popular sense, a company may in every case be said to carry on business for and on behalf of its share-holders; but this certainly does not in point of law constitute the relation of principal and agent between them or render the shareholders liable to indemnify the company against the debts which it incurs.

In the Court of Appeal (sub nom. Broderip v Salomon [1895] 2 Ch 323 at p 333), it was held that Mr Salomon had incorporated the company contrary to the true intent and meaning of CA 1862, and that, because of Mr Salomon’s fraud, the company should be declared to have operated the business as trustee for Mr Salomon, who should therefore indemnify the company for all debts incurred in carrying out the trust. C e House of Lords also rejected this argument. C ere was nothing at all in the Act to show that what Mr Salomon had done was prohibited. Indeed, Lord Macnaghten pointed out ([1897] AC 22 at p 52) that in an earlier case (Re Baglan Hall Colliery Co. (1870) LR 5 Ch App 346), Gi ̂ard LJ had said (at p 356) that it was ‘the policy of the Companies Act’ to enable business people to incorporate their businesses and so avoid incurring further personal liability. Lord Macnaghten said ([1897] AC 22 at p 51):

When the memorandum is duly signed and registered . . . the subscribers are a body corporate ‘capable forth-with’, to use the words of the enactment, ‘of exercising all the functions of an incorporated company’. C ose are strong words. C e company attains maturity on its birth. C ere is no period of minority—no interval of incapacity. I cannot understand how a body corporate thus made ‘capable’ by statute can lose its individual-ity by issuing the bulk of its capital to one person, whether he be a subscriber to the memorandum or not. C e company is at law a di ̂erent person altogether from the subscribers to the memorandum; and, though it may be that aP er incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the proT ts, the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. C at is, I think, the declared intention of the enactment.



Lord Halsbury LC said, at pp 30–1:

. . . it seems to me impossible to dispute that once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are.

For the background to Salomon v A Salomon and Co Ltd, which is probably the most famous case in company law, see G R Rubin, ‘Aron Salomon and his circle’, in Essays for Clive SchmitthoC , John Adams (ed.) (Abingdon: Professional Books, 1983), pp 99–120. Following the case, Parliament enacted provisions in the Companies Act 1900 requiring the public registration of charges on com-pany property (see 11.7) and in the Companies Act 1907 enabling liquidators to avoid c oating charges given to secure pre-existing debts (see 11.6.7.1). L S Sealy, ‘Modern insolvency laws and Mr Salomon’ (1998) 16 C & SLJ 176, discusses various statutory provisions which might have applied if Salomon’s case had occurred a century later than it did, but concludes that it is unlikely Mr Salomon could be made liable under them.

5.2.2 a company’s business is its businessC e House of Lords in Salomon v A Salomon and Co Ltd [1897] AC 22 recognised that a company’s business is conducted by the company as a separate person (see also per Lord Sumner in Gas Lighting Improvement Co Ltd v Commissioners of Inland Revenue [1923] AC 723 quoted in 5.4.2). It is the company as a separate person that owns the company’s property and enters into contracts and incurs debts. C is has been a= rmed in many di ̂erent contexts.

It is the company as a separate person that conducts the company’s business and so any defama-tory statement made about that business defames the company as a separate person, which may sue for libel or slander (Metropolitan Saloon Omnibus Co Ltd v Hawkins (1859) 4 Hurl & N 87; South Hetton Coal Co Ltd v North-Eastern News Association Ltd [1894] 1 QB 133; Jameel v Wall Street Journal Europe SPRL [2006] UKHL 44, [2007] 1 AC 359). A company, as a person separate from its members, may even sue one of its own members for libel (Metropolitan Saloon Omnibus Co Ltd v Hawkins). However, a company cannot be awarded aggravated damages, because aggravated dam-ages compensate for injury to feelings caused by the manner in which a wrong was committed, and a company has no feelings to be injured (Collins Stewart Ltd v Financial Times Ltd [2005] EWHC 262 (QB), [2006] EMLR 5).

In Cristina v Seear [1985] 2 EGLR 128, Mr and Mrs Cristina claimed the protection of part II of the Landlord and Tenant Act 1954, which gives security of tenure when leased land is occupied for the purposes of a business carried on by the tenant. C e Cristinas were the tenants of premises on which a business was conducted but the business was carried on by a company whose shares were all owned by the Cristinas, so the business was not carried on by the tenants of the premises and the tenancy was not covered by the Act.

C ere is a danger that the principle that a company’s business is conducted by the company rather than its members or directors could lead to people who are responsible for making a com-pany commit criminal o ̂ences being excused because the company committed the crime, not them. As will be explained in 19.8.4.9, statutes creating criminal o ̂ences for the regulation of economic activity usually provide that a director or other o= cer of a company who consented to or connived at the company’s commission of an o ̂ence may be prosecuted along with the company.

Normally, when one person, A, buys all the shares in a company, B, there is no transfer of the undertaking or business of B to A for the purposes of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) (Brookes v Borough Care Services Ltd [1998] ICR 1198). In Print Factory (London) 1991 Ltd v Millam [2007] EWCA Civ 322, [2007] ICR 1331, though, the Court of Appeal upheld the employment tribunal’s T nding that there had been a



transfer on the purchase of a company’s shares because of the extent to which that business had been integrated into the purchaser’s business.

5.2.3 members of a company have no interest in its propertyA company’s property is the property of the company as a separate person not the members. C is is illustrated by Macaura v Northern Assurance Co Ltd [1925] AC 619. C e owner of a timber estate sold all the timber to a company in which he owned almost all the shares. He was also the company’s largest creditor. He insured the timber against T re by policies taken out in his own name. C e timber was destroyed by T re and he sued the insurance company. C e House of Lords held that in order to have an insurable interest in property a person must have a legal or equitable interest in the property and not merely a moral certainty of proT ting or losing from the property (the so-called ‘factual expectancy test’). Accordingly, Macaura’s claim failed because, as Lord Wrenbury said, at p 633:

My Lords, this appeal may be disposed of by saying that the corporator even if he holds all the shares is not the corporation, and that neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation.

See also Acatos and Hutcheson plc v Watson [1995] 1 BCLC 218 discussed in 10.6.9.Generally, a member of a company cannot claim compensation for damage done to the com-

pany’s property or business. So a member of a company cannot bring legal proceedings to obtain redress for injury done to the company—see 18.3 and 18.4.3.

A company is normally both the legal and the beneT cial owner of its property: there is no rule of company law which constitutes a company trustee of its property with the members (or any other person) as beneT ciaries of the trust (J J Harrison (Properties) Ltd v Harrison [2001] EWCA Civ 1467, [2002] 1 BCLC 162, at [25]). It follows that the members of a company cannot normally be described as the ‘beneT cial owners’ of its property ( e Maritime Trader [1981] 2 Lloyd’s Rep 153). C e fact that the members of a company hold their shares in the company in trust for others does not make the beneT ciaries of that trust beneT cial owners of the company’s property (Ayton Ltd v Popely [2005] EWHC 810 (Ch), LTL 19/9/2005). However, a company, like any other person, can become a trustee of property under the usual rules on the creation of trusts and appointment of trustees.

In Farrar v Farrars Ltd (1888) 40 ChD 395 three individuals were joint mortgagees of a stone quarry. When the interest on the mortgage debt was not paid they decided to exercise their power of sale. C ey sold the quarry to Farrars Ltd, a company in which two of them held shares. C e mortga-gors asked for the sale to be rescinded but the court refused. Lindley LJ explained, at pp 409–10:

It is perfectly well settled that a mortgagee with a power of sale cannot sell to himself either alone or with others, nor to a trustee for himself . . . . A sale by a person to himself is no sale at all . . . .

A sale by a person to a corporation of which he is a member is not, either in form or in substance, a sale by a person to himself. To hold that it is, would be to ignore the principle which lies at the root of the legal idea of a corporate body, and that idea is that the corporate body is distinct from the persons composing it.

(A mortgagee exercising a power of sale does have a duty to take reasonable precautions to obtain the best price reasonably obtainable at the time of sale: the mortgagees in Farrar v Farrars Ltd had complied with this duty, but in the similar case of Tse Kwong Lam v Wong Chit Sen [1983] 1 WLR 1349 the mortgagee failed to prove he had discharged the duty, and damages were awarded to the mortgagor.)

In Re Lewis’s will trusts [1985] 1 WLR 102, Mr Tudor Rhys Lewis had made a will dated 11 August 1964 by which he gave ‘my freehold farm and premises, known as Talygarn, Pontyclun . . . to my son’. However, since January 1961 the farm had actually been owned by G R Lewis (Talygarn) Ltd in which Mr Lewis had a majority shareholding. On his death in 1978, Mr Lewis owned 750 of the 1,000 shares in the company; the remainder were owned by the son, to whom the will gave the



farm, and the son’s wife. As Mr Lewis did not own the farm at his death, it was not given by his will and it was held that the statement in the will could not be taken as referring to Mr Lewis’s shares in the company. C ose shares were therefore to be divided between Mr Lewis’s son and daughter under the rules on intestate succession.

5.2.4 members of a company cannot sue on its behalfC e legal rights of a company belong to the company as a separate person and not to its members. So the members of a company do not have standing to claim remedies for wrongs done to the company (see 18.4).

5.2.5 a company may contract with its membersBecause a company is a person separate from its members, a company can enter into transactions with its members (see Farrar v Farrars Ltd (1888) 40 ChD 395 discussed in 5.2.3). In particular, money which the members of a company pay to the company for their shares belongs to the com-pany as a separate person (see Chapter 10 on restrictions on the return of capital to members), and when a company has paid a dividend to its members the money paid no longer belongs to the company as a separate person (see per Cotton LJ in Re Exchange Banking Co, FlitcroB ’s Case (1882) 21 ChD 519 at p 536 where his Lordship summarised the position by saying that: ‘C e corporation is not a mere aggregate of shareholders’).

In Wurzel v Houghton Main Home Delivery Service Ltd [1937] 1 KB 380 a vehicle owned by the defendant company was used to deliver coal to its members. C e members paid delivery charges to the company. It was held that the vehicle was used for the carriage of goods for hire or reward, which went beyond the use allowed for the vehicle under the statutory scheme then in force for licensing road haulage.

Similarly, a company can employ one of its members under a contract of service. In Lee v Lee’s Air Farming Ltd [1961] AC 12 the company employed Mr Lee who owned 2,999 of the company’s 3,000 shares, was its only director and had been appointed ‘governing director’ for life. Mr Lee was killed in the course of his work for the company. C e company’s insurers alleged that there was no contract of service so that no claim could be made under legislation which made employ-ers liable to pay compensation for accidental personal injury su ̂ered by their employees at work. C e insurers said that it was impossible for Mr Lee, as the director of the company, to make, on its behalf, a contract with himself. But Lord Morris of Borth-y-Gest said, at p 26:

In their lordships’ view it is a logical consequence of the decision in Salomon v A Salomon and Co Ltd [1897] AC 22 that one person may function in dual capacities. C ere is no reason, therefore, to deny the possibility of a contractual relationship being created as between the deceased and the company.

C e Privy Council also rejected the insurers’ argument that Mr Lee as governing director could not give orders to himself as employee. Lord Morris said, at p 30:

C ere appears to be no greater di= culty in holding that a man acting in one capacity can give orders to himself in another capacity than there is in holding that a man acting in one capacity can make a contract with himself in another capacity.

See also Secretary of State for Trade and Industry v Bottrill [1999] ICR 592.

5.2.6 a company survives the death of its membersC e Australian case of Re Noel Tedman Holdings Pty Ltd [1967] QdR 561 is a striking illustration of the consequences of separate personality. Noel Tedman and his wife were the sole shareholders and



directors of two companies. C ey were both killed as a result of a road tra= c accident. However, their deaths did not cause the termination of their companies’ legal existence. C e companies continued as owners of property and parties to uncompleted contracts. C e personal representa-tives of the deceased shareholders sought the court’s assistance to enable them to appoint new directors of the companies so as to realise their property for the beneT t of the deceaseds’ estates. (C e problem in the case and the solution found by the court depended on the special wording of the articles of the companies and will not be of general application.)

Of course, if a company whose entire membership has died has no assets worth bothering about, or there are no personal representatives to take the necessary action, the company may itself become defunct and will eventually be dissolved by the registrar striking it o ̂ the register under CA 2006, s 1000 (see 20.16.2.4).

5.2.7 detriment of membersPersons are entitled to incorporate companies for the purpose of separating their business a ̂airs from their personal a ̂airs or for the purpose of separating the a ̂airs of one part of a business from another part. In doing so they are relying on the separate personalities of the companies they incorporate and this separate personality is respected by the courts, even if it is to the detriment of the incorporators. For example, in Sociedade Nacional de Combustiveis de Angola UEE v Lundqvist [1991] 2 QB 310, the claimants in a claim against Mr Lundqvist had obtained a court order requir-ing a Liberian company, which was controlled by and was the employer of Mr Lundqvist, to give details of Mr Lundqvist’s assets so that the claimants could check that he complied with a freezing injunction they had obtained against him. C e order requiring this information nominated Mr Lundqvist to give it on behalf of his company, but Mr Lundqvist claimed that the information would incriminate him, and that he should be excused from giving it. C e Court of Appeal, how-ever, observed that the order could be amended by nominating someone else to give the informa-tion on behalf of the company. In the similar case of Tate Access Floors Inc. v Boswell [1991] Ch 512, Browne-Wilkinson V-C said, at p 531:

If people choose to conduct their a ̂airs through the medium of corporations, they are taking advantage of the fact that in law those corporations are separate legal entities, whose property and actions are in law not the property or actions of their incorporators or controlling shareholders. In my judgment controlling shareholders cannot, for all purposes beneT cial to them, insist on the separate identity of such corporations but then be heard to say the contrary when [disclosure of documents] is sought against such corporations.

5.3 avoiding effects of corporate separate personality

5.3.1 introductionSalomon v A Salomon and Co Ltd [1897] AC 22 is a cornerstone of English company law. Lord Templeman, speaking extra-curially, described it as an ‘unyielding rock’ (‘Forty years on’ (1990) 11 Co Law 10). It shows that the most important characteristic of a registered company is that it is both an association of its members and a person separate from its members. As explained in 1.3.1, this separate personality is a consequence of the fact that, by CA 2006, s 16(2), a registered company is deT ned to be a body corporate. A registered company acquires its separate personal-ity on incorporation by registration and all that is necessary to achieve this is to comply with the formal requirements of the Act. C e motives of the persons who incorporate the company are irrelevant (see the passage in the judgment of Lord Halsbury LC in Salomon’s case quoted in 5.2.1;



see also Princess of Reuss v Bos (1871) LR 5 HL 176). It may be that when Parliament T rst provided for incorporation of companies by registration in 1844 it intended the procedure to be used only by entrepreneurs inviting numerous investors to join them in enterprise to increase the prosper-ity of the nation (see 2.3.3.2). But there is no provision to that e ̂ect in CA 2006. Accordingly, as a matter of statutory construction, it is literally true that any one or more persons—natural or legal—may register a limited company (CA 2006, s 7(1)), provided it is not for an unlawful purpose (s 7(2)), and on registration the company will be incorporated (s 16(2)) and so have a separate legal personality. Moreover, the members of a limited company have limited liability (Insolvency Act 1986, s 74, discussed in 2.3.2). Salomon’s case showed that incorporation, separate personality and limited liability are available to all, for any lawful purpose. Ingenious people have discovered that companies can be used as vehicles for an enormous variety of transactions and schemes.

C e enormous practical advantage of the existence of the separate personality of a company is that the company as a separate person can be put into legal relationships, for example, as a party to contracts or as the owner of property, and it is the company as a separate person, not the members, that has the rights and obligations involved in the legal relationships to which it is a party. A com-pany as a person separate from its members requires human agents to decide what voluntary legal relationships it is to enter into and to perform any physical acts necessary to enter into those rela-tionships, but it is the company as a separate person that has the rights and duties of those relation-ships, not the humans who established them. C ose humans act only as agents of the company.

People sometimes dislike the results of conT ning the rights and especially the obligations of a company’s legal relationships to the company as a separate person, and they want the rights or obli-gations to be transferred to the members, or perhaps to directors or other persons connected with the company. In e ̂ect they want to ignore the artiT cial separate personality of a company, at least in certain circumstances. C is is usually known as piercing the veil of incorporation (see 5.3.2.2) and the circumstances in which it may happen are examined in the rest of 5.3.

5.3.2 what amounts to ignoring separate personality?5.3.2.1 Narrower and wider views of the consequences of separate personalityC ere are two views of what legal consequences follow from the principle of separate corporate personality.

C e narrower view is that it means that a company’s property, rights and liabilities belong to the company and not to its members, directors, or another company in the same group. C is was the view taken in 5.2.

C e wider view is that it also prevents those other persons from having any e ̂ect on, or being considered in relation to, a company’s legal rights and obligations. C ere appears to be no principle of company law that requires separate corporate personality to have this wider e ̂ect. Nevertheless, the wider view is oP en asserted. Courts sometimes recognise a wider view of the e ̂ect of corporate personality, if only to assert a power to ignore that wider e ̂ect (see 5.3.2.3, 5.3.6.3 and 5.3.14).

In the narrower view, consequences of a company’s separate personality are avoided only when its property, rights or liabilities are treated as the property, rights or liabilities of another person. C is can be done only when permitted by one of the legal principles listed in 5.3.3. In the wider view consequences are also regarded as avoided whenever a court considers information about a company’s members, and/or directors and/or other companies in the same group when deciding a case concerning the company. C ere appears to be no restriction on doing this.

5.3.2.2 - e veil of incorporationAvoiding consequences of the separate personality of a company is oP en described in metaphorical terms as removing a ‘veil of incorporation’. It may be described as ‘piercing’, ‘setting aside’, ‘liP ing’ or ‘going behind’ the veil.



C e use of these vague metaphors makes it di= cult to discover what the true issues are. Some clariT cation was attempted by Staughton LJ in Atlas Maritime Co SA v Avalon Maritime Ltd (No. 1) [1991] 4 All ER 769, saying, at p 779:

To pierce the corporate veil is an expression that I would reserve for treating the rights or liabilities or activ-ities of a company as the rights or liabilities or activities of its shareholders. To liB the corporate veil or look behind it, on the other hand, should mean to have regard to the shareholding in a company for some legal purpose.

Treating the rights or liabilities or activities of a company as those of its shareholders (or of anyone else)—‘piercing the veil’ in Staughton LJ’s terminology—certainly avoids the consequences of corporate separate personality on both the narrower and the wider views of what those con-sequences are. Lord Russell of Killowen had this to say about it in EBM Co Ltd v Dominion Bank [1937] 3 All ER 555, at pp 564–5:

C eir Lordships [of the Privy Council] believe it to be of supreme importance that the distinction should be clearly marked, observed and maintained between an incorporated company’s legal entity and its actions, assets, rights and liabilities on the one hand, and the individual shareholders and their actions, assets, rights and liabilities on the other hand.

Taking account of a company’s membership when deciding its rights and liabilities—what Staughton LJ called ‘liP ing’ or ‘looking behind’ the corporate veil—is not uncommon and there seems to be no principle of company law that can prevent it happening. Some of the cases are discussed in 5.3.9 and 5.3.10. It amounts to avoiding consequences of separate personality on the wider view of what those consequences are, but not on the narrower view.

C e expression ‘liP the corporate veil’ may be a helpful shorthand, but it must not be used in a court order, which must set out clearly and speciT cally what is to be done or not to be done by the persons it a ̂ects (Re G (Restraint Order) [2001] EWHC 606 (Admin), [2002] STC 391).

5.3.2.3 Another wider view of the eB ects of corporate separate personalityIn Jennings v Crown Prosecution Service [2008] UKHL 29, [2008] 2 WLR 1148, Mr Jennings and three other individuals were convicted of conspiracy to defraud. C e fraud consisted of persuading people to pay advance fees to a company for the arrangement of loans, knowing that no loans would in fact be made. Mr Jennings was an employee of the company but not a director or shareholder. AP er he was charged, the Crown obtained an order restraining him from disposing of property alleged to have been obtained as a result of, or in connection with, committing the o ̂ence. He contended that this was an illegitimate piercing of the company’s corporate veil. C e House of Lords said, at [15]:

C e Court of Appeal rejected the argument, pointing out . . . that the application [for the restraining order, and the order itself] did not seek to restrain the appellant from dealing with anything which belonged, nominally or actually, to the company on the footing that nevertheless it fell to be treated as the appellant’s realisable property. C at, in the committee’s opinion, is a su= cient answer to the point.

C is paragraph states that the order did not disregard the narrower view of the consequences of the company’s separate personality (see 5.3.2.1). But the appellate committee went on to say that there were other answers to the appellant’s assertion. At [16] the committee said:

In the ordinary way acts done in the name of and on behalf of a limited company are treated in law as the acts of the company, not of the individuals who do them. C at is the veil which incorporation confers. But here the acts done by the appellant and his associate Mr Phillips in the name of the company have led to the conviction of one and a plea of guilty by the other. C us the veil of incorporation has been not so much pierced as rudely torn away.



C is paragraph seems to assume that separate corporate personality has wider e ̂ects. However, those wider e ̂ects are not required by company law. A company’s separate legal personality is the same, as far as possible, as an individual’s legal personality. C e civil and criminal liabilities of an individual who acts on a company’s behalf are the same as the liabilities of one who acts on behalf of another human being. A person who acts on another’s behalf to make that other a party to a contract does so as an agent of the other person, who is called the agent’s principal (see 5.3.6.1 and 19.5). C e principal becomes a party to the contract but the agent does not. If the principal breaches the contract, the agent is not liable. C e fact that the principal is a company does not make any di ̂erence to these rules of agency law. As Lord Lindley said in Citizens’ Life Assurance Co Ltd v Brown [1904] AC 423, at p 426:

If it is once granted that corporations are for civil purposes to be regarded as persons, ie, as principals acting by agents and servants, it is di= cult to see why the ordinary doctrines of agency and of master and servant are not to be applied to corporations as well as to ordinary individuals.

If an individual performs an act that constitutes a crime, it is no defence to say that the act was per-formed on behalf of another. C at is so whether the other person is a company or a human being. Mr Jennings and his co-conspirators were convicted for what they did, not what the company did, and nothing needed to be done to a corporate veil in order to convict them.

5.3.3 ways of avoiding consequences of separate personality

5.3.3.1 General legal principles under which another person may be made responsible for a company’s liabilitiesC ere are several legal principles, applying to all persons, natural or legal, by which one person can be made responsible for another person’s liabilities, and those principles can be applied to com-panies just as much as to human beings. C e following paragraphs discuss: statute (5.3.4), contract (5.3.5), agency (5.3.6), refusal to allow reliance on a sham (5.3.7), recognition of one person’s con-trol of another’s property (5.3.8).

5.3.3.2 Speci� c company law principlesC e interesting question is whether there is a common law doctrine speciT c to companies which would enable a court to order the rights and liabilities of a company to be transferred to its mem-bers, or the rights and liabilities of the members of a company to be transferred to the company. In other words, are there special characteristics of companies which require transfer of their rights or obligations and which do not arise in relation to natural persons?

C e most commonly used principle by which a company, though an artiT cial legal person, is treated as sharing the human characteristics of individuals connected with it is the identiT cation theory, which is discussed in 19.8. C is is a principle which is speciT c to company law: it exists because of the need to make companies subject to laws which are only applicable to persons who have knowledge or intention, which have to be supplied to a company from the individuals con-nected with it. C e identiT cation theory overcomes the deT ciency in the separate personality of a company that it cannot think.

C ere are some special rules concerning standing to apply for judicial review (see 5.3.11). C ere is controversy over whether there should be special rules for groups of companies (see 5.3.12). Various other principles have been suggested (see 5.3.13).

5.3.3.3 Does avoiding consequences of separate personality mean denying it altogether?Canadian courts, at least, have taken the view that avoidance of consequences of a company’s



separate personality, under the principles listed in 5.3.3.1 and 5.3.3.2, never involves treating the incorporation of the company as a nullity: separate personality is ignored only for a speciT c pur-pose. As the Saskatchewan Court of Appeal said in Nedco Ltd v Clark (1973) 43 DLR (3d) 714 at p 721:

. . . the fact that the court does liP the corporate veil for a speciT c purpose in no way destroys the recognition of the corporation as an independent and autonomous entity for all other purposes.

See also per Rand J in Aluminum Co of Canada Ltd v Toronto [1944] 3 DLR 609 at p 614; per Reed J in Alberta Gas Ethylene Co Ltd v Minister of National Revenue (1988) 24 FTR 309 at p 314.

5.3.4 statutory provisionsIn Dimbleby and Sons Ltd v National Union of Journalists [1984] 1 WLR 427 Lord Diplock said, at p 435:

C e ‘corporate veil’ in the case of companies incorporated under the Companies Act is drawn by statute and it can be pierced by some other statute if such other statute so provides; but, in view of its raison d’ être and its consistent recognition by the courts since Salomon v A Salomon and Co Ltd [1897] AC 22, one would expect that any parliamentary intention to pierce the corporate veil would be expressed in clear and unequivocal language. I do not wholly exclude the possibility that even in the absence of express words stating that in speciT ed circumstances one company, although separately incorporated, is to be treated as sharing the same legal personality of another, a purposive construction of the statute may nevertheless lead inexorably to the conclusion that such must have been the intention of Parliament.

Examples can be found in statutes conferring beneT ts on occupiers of land. One example is the Landlord and Tenant Act 1954, s 30, which sets out the circumstances in which a landlord of a business tenant can oppose renewal of the tenant’s lease. One of these circumstances is where it is intended that the premises will be occupied for the purposes of a business to be carried on by the landlord. In Tunstall v Steigmann [1962] 2 QB 539 it was held that, under the section as originally enacted, an intention that a company which the landlord controlled should occupy the premises for the purposes of its business was not su= cient to provide a ground for opposition. C e Act has since been amended and now covers an intention that a company in which the landlord has a controlling interest is to occupy the premises for the purposes of its business (s 30(1A)). It also now covers the situation where the landlord is a company and the intention is that a person with a controlling interest in the company is to occupy the premises for the purposes of that person’s busi-ness (s 30(1B)), but only if the controlling interest has been held for at least T ve years (s 30(2A)). A second example is the statutory provision that, for the purposes of relief from inheritance tax for agricultural property, occupation of such property by a company controlled by an individual can count as occupation by the individual (Inheritance Tax Act 1984, ss 116, 117, 122 and 123).

Since the separate legal personality of a company arises only when the formal requirements of the Companies Act are complied with, it is not perhaps surprising that the legislature should wish to impose sanctions, including personal liability, on persons in breach of certain fundamental requirements. For example, IA 1986, s 213, imposes personal liability on any person (not just a member) who knowingly carries on a company’s business with intent to defraud creditors or for any other fraudulent purpose (see 20.11). C e legislature is here not allowing the T ction created by the Companies Act to be used as a vehicle of fraud, but it is signiT cant that the liability is to make a payment to the company, which is hardly a denial of the company’s separate personality. C e same applies to IA 1986, s 214 (liability of directors for wrongful trading).

A public company may not do business or exercise any borrowing powers unless it has com-plied with the requirements as to minimum share capital (see CA 2006, s 176, discussed in 6.6.1). Since the power to trade or borrow in this situation is denied and is regarded by Parliament as a



fundamental requirement of company law, it is not surprising that personal liability should be imposed on the directors for any loss or damage su ̂ered by a third party who has entered into a transaction with a company which is in contravention of the provision (s 767(3)). C is liability is only imposed, however, if the company itself fails to comply with its obligations under the transac-tion, and it is di= cult to see how this provision a ̂ects the principle of corporate personality.

It is submitted that the provisions just discussed, whilst undoubtedly imposing personal liability on shareholders, directors and others who are responsible for breach of the formal requirements consequent upon incorporation, do not represent a desire on the part of the legislature to disregard the company’s separate personality, but merely impose additional liability on those responsible for the expression of the corporate personality in these circumstances.

5.3.5 contractIt is very common for the members of an owner-managed company to make contracts agreeing to guarantee its obligations. Banks and landlords are usually able to insist on guarantees which e ̂ect-ively nullify the limited liability that the members have in company law.

5.3.6 agency

5.3.6.1 Company as agent of its membersIf the legal relationship of agency exists between two persons, called the principal and the agent, then the principal is responsible for whatever the agent does within the scope of the agency. Also the agent has authority to create legal relations, such as contracts, between the principal and third parties. Whether one person is an agent of another is a question of fact, and agency can be inferred from the surrounding circumstances, though it can only be established by the consent of the prin-cipal and the agent (Garnac Grain Co Inc. v H M F Faure and Fairclough Ltd [1968] AC 1130). Salomon v A Salomon and Co Ltd [1897] AC 22 established that the circumstance that a person is a member of a company does not in itself make the company an agent of that person (and see per Viscount Cave LC in Gas Lighting Improvement Co Ltd v Commissioners of Inland Revenue [1923] AC 723 at p 732). Agency cannot be inferred from the control exercisable by the members over the company—either by virtue of their votes in general meeting or because they are also directors—or from the fact that the sole objective of the company is to beneT t the members (per Tomlin J in British omson-Houston Co Ltd v Sterling Accessories Ltd [1924] 2 Ch 33 at p 38; Kerr LJ in J H Rayner (Mincing Lane) Ltd v Department of Trade and Industry [1989] Ch 72, CA, at pp 188–9; [1990] 2 AC 418, HL, per Lord Oliver of Aylmerton at p 515). Usually the fact that the members of a company do not intend that it is to be their agent is su= cient to show that no agency relationship exists, because there was no consent to one being created (Yukong Line Ltd v Rendsburg Investments Corporation (No. 2) [1998] 1 WLR 294 at p 304). C e fact that one company is a subsidiary of another company (see 14.15) does not in itself make the subsidiary an agent of its parent company. In Ebbw Vale Urban District Council v South Wales Tra? c Area Licensing Authority [1951] 2 KB 366 Cohen LJ said, at p 370:

Under the ordinary rules of law, a parent company and a subsidiary company, even a 100 per cent subsidiary company, are distinct legal entities, and in the absence of an agency contract between the two companies one cannot be said to be the agent of the other. C at seems to me to be clearly established by Salomon v A Salomon and Co Ltd and by the observations of Tomlin J in British omson-Houston Co Ltd v Sterling Accessories Ltd.

In practice, it is very unlikely that a company will be found to be the agent of its members, see Yukong Line Ltd v Rendsburg Investments Corporation (No. 2) and Bank of Montreal v Canadian Westgrowth Ltd (1990) 72 Alta LR (2d) 319, which is discussed in 5.3.12.3.



5.3.6.2 Company carrying on business as agent of its membersC e characteristic feature of agency is that the agent has authority or capacity to create legal rela-tions between the principal and third parties. In order to T nd that a company is the agent of one or more of its members, this authority or capacity must be present. In practice, though, the whole object of creating a company to carry on a business is that the business will be the company’s busi-ness and not the members’ business. It will be very rare to T nd that members have set up a company to run a business which they have retained ownership of, but this was what happened in Smith, Stone and Knight Ltd v Birmingham Corporation [1939] 4 All ER 116. Smith, Stone and Knight Ltd carried on a business manufacturing paper. It acquired from a partnership a business of dealing in waste paper. It incorporated a wholly owned subsidiary company called Birmingham Waste Co Ltd, which nominally operated the waste-paper business, but it never actually transferred owner-ship of the waste-paper business to that subsidiary, and it retained ownership of the land on which the waste-paper business was operated. Atkinson J found that the waste-paper business was still the business of the parent company and that it was operated by the subsidiary as agent of the parent company. Accordingly, on the compulsory purchase of the land on which the waste-paper business was operated, the parent company was entitled to compensation both for the value of the land and for disturbance of the business because it owned both the land and the business. Smith, Stone and Knight Ltd owned 497 of the 502 issued shares of Birmingham Waste Co Ltd. C e other T ve were held by nominees of Smith, Stone and Knight Ltd. In this case, unlike the position in Salomon v A Salomon and Co Ltd [1897] AC 22, Birmingham Waste Co Ltd was found to be carrying on busi-ness as agent of its principal member. C e crucial di ̂erence is that the business of A Salomon and Co Ltd was formally transferred to it by its principal member, Mr Salomon, and so had become the business of the company, whereas the business which Birmingham Waste Co Ltd operated was never transferred to it and remained the property of its principal member.

Because of the surrounding circumstances, a company may be found to be an agent of some person who is not a member of the company. For example, in William Cory and Son Ltd v Dorman Long and Co Ltd [1936] 2 All ER 386, a holding company was found to be carrying on a business as agent of its wholly owned subsidiary: the situation was the reverse of that in Smith, Stone and Knight Ltd’s case in that instead of the company being the agent of its principal member, the prin-cipal member was agent of the company.

Deciding who owns a business can be important for tax purposes. Normally, for tax purposes, the business of a company is not the business of its members (Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89) or of any person other than the company itself. C erefore, it is the com-pany, not its members or any other person, which is liable to pay tax on the proT ts of its busi-ness (see 5.2.2). In Firestone Tyre and Rubber Co Ltd v Lewellin [1957] 1 WLR 464, the appellant company was the wholly owned subsidiary of a United States company. C e appellant company manufactured tyres for sale to distributors in Europe. Its parent company had arranged special contracts with these distributors, and with the appellant company, which were claimed to have the e ̂ect that the business of selling tyres to European distributors was not carried on in the United Kingdom and so not subject to United Kingdom tax. It was held, however, that the true e ̂ect of the arrangements was that the business was the business of the parent company carried on in the United Kingdom through the appellant company acting as its parent company’s agent. Tax on the proT ts or gains arising through or from the agency was therefore properly assessable and charge-able in the name of the agent (the appellant company) under what is now the Taxes Management Act 1970, s 79. C e agency in this case resulted from the trading arrangements set up by the parent company. C ose arrangements would have successfully avoided United Kingdom tax had it not been found, as a fact, that the business was carried on in the United Kingdom.

For a detailed discussion of the taxation of a business run by one person on behalf of another, see R Flannigan, ‘Corporations controlled by shareholders: principals, agents or servants?’ (1986–7) 51 Sask L Rev 23.



In Smith, Stone and Knight Ltd v Birmingham Corporation, Atkinson J, at p 121, analysed cases in which the question was whether business carried on by a subsidiary company was the business of its parent company on which the parent was liable to pay tax. His Lordship found six points which had to be taken into consideration in answering that question. In Yukong Line Ltd v Rendsburg Investments Corporation (No. 2) [1998] 1 WLR 294, Toulson J rejected the submission that these points should determine whether a company is carrying on business as another person’s agent. In Alberta Gas Ethylene Co Ltd v Minister of National Revenue (1988) 24 FTR 309, Reed J rejected the submission that whenever the six criteria are met the company’s separate personality can be ignored. C e six points were, however, used to establish agency in Spreag v Paeson Pty Ltd (1990) 94 ALR 679 in the Federal Court of Australia.

It is submitted that treating a company as the agent of its controllers is a complete a= rmation of the corporate entity principle since the agency relationship demands two legally recognisable parties.

5.3.6.3 Validating agreement in restraint of tradeIn Stenhouse Australia Ltd v Phillips [1974] AC 391 a company and one of its employees made a contract providing that, aP er termination of the employment, the employee would not do business with any clients of the company or its subsidiaries for T ve years. C e employee argued that this was an illegal restraint of trade, because it protected the interests of companies, which were separate persons, other than his employer. C e Privy Council (per Lord Wilberforce) rejected this, saying, at p 404:

C e evidence is clear that the business of the Stenhouse Group was controlled and coordinated by the appellant company, and all funds generated by each of the companies were received by the appellant. C e subsidiaries were merely agencies or instrumentalities through which the appellant company directed its integrated business.

Lord Wilberforce used ‘agencies and instrumentalities’ here to characterise a situation in which a restraint of trade is permissible, not to identify a subsidiary as an agent, in law, of its holding company, with authority to put the holding company into contractual relations with other persons. C at would be inconsistent with the cases discussed in 5.3.6.1.

In Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613, [2007] ICR 1539, it was held that a restraint-of-trade contract which referred only to clients of a holding company was to be construed as also restraining trade with that company’s subsidiaries. C e court found that the parties intended the contract to have that construction. Lord Wilberforce’s statement was invoked in order to reject an argument that the construction should not be adopted because of the separate personalities of the holding company and its subsidiaries.

It is submitted that these are cases in which the court has acknowledged connections between companies rather than ignored their separate personalities. C ese cases may be contrasted with Newton-Sealy v Armorgroup Services Ltd [2008] EWHC 233 (QB), LTL 21/2/2008, in which it was held that a contract of employment with one company in a group cannot be treated as a contract with other companies in the group.

5.3.6.4 Note on company taxationShareholders complain that if a company pays tax on its proT ts and the shareholders pay tax when those proT ts are distributed to them then the proT ts have been taxed twice and that this is unfair. One way of dealing with these complaints is to ‘impute’ (that is, credit) the tax paid by a company on its proT ts to the company’s shareholders. It would be very di= cult to achieve this precisely in practice: a company is required to pay tax on all its proT ts for a year but does not necessarily dis-tribute all those proT ts to its shareholders in that year; companies and their shareholders are taxed in respect of di ̂erent accounting periods and pay their taxes at di ̂erent times—it would be very



di= cult to keep track of the amounts involved so as to attribute exactly to its shareholders the tax paid by a company.

C e compromise imputation system in UK taxation is that when a company pays a dividend to a shareholder, the shareholder is deemed for taxation purposes to receive a tax credit with a value linked to the value of the dividend (Income Tax (Trading and Other Income) Act 2005, s 397). C is tax credit can be o ̂set against the shareholder’s tax bill. A tax credit received by a shareholder counts as part of the shareholder’s income for tax purposes (s 398): the amount of the tax credit is calculated so that it is equal to the basic rate of income tax payable on the sum of the tax credit plus the dividend actually paid.

5.3.7 sham or pretence; evading enforcement of existing rightsIn a number of cases a person subject to a legal obligation has employed a company to evade that obligation and the court has ordered both the person and the company to comply with the obliga-tion, describing the company as a ‘sham’ (usually in conjunction with other terms such as ‘cloak’ or ‘mask’). C e ‘sham’ epithet comes from the words of Lindley LJ in a case not involving a com-pany, Smith v Hancock [1894] 2 Ch 377. In that case, Mr C omas Prosperous Hancock had sold his grocery shop, trading as ‘T P Hancock’, to Mr Smith and had promised not to carry on another grocery business within T ve miles of the shop for the next 10 years. Seven years later his wife and her nephew opened a grocery shop 200 yards away under the style ‘Mrs T P Hancock’, using the goodwill attached to Hancock’s name. C e Court of Appeal by a majority found that this was not a breach of the covenant but Lindley LJ said, at p 385:

If the evidence admitted of the conclusion that what was being done was a mere cloak or sham, and that in truth the business was being carried on by the wife and [the nephew] for [Mr Hancock], or by [Mr Hancock] through his wife for [the nephew], I certainly should not hesitate to draw that conclusion, and to grant the [claimant] relief accordingly.

C is was applied in Gilford Motor Co Ltd v Horne [1933] Ch 935, in which the defendant, Mr E B Horne, attempted to evade a covenant not to compete with the claimant by getting his wife, J M Horne, to form a company, J M Horne and Co Ltd, which carried on business in competition with the claimant. Lord Hanworth MR said, at p 956:

I am quite satisT ed that this company was formed as a device, a stratagem, in order to mask the e ̂ective carrying on of a business of Mr E B Horne. C e purpose of it was to try to enable him, under what is a cloak or a sham, to engage in business which, on consideration of the agreement which had been sent to him just about seven days before the company was incorporated, was a business in respect of which he had a fear that the [claimant] might intervene and object.

C e court restrained both Mr Horne and the company from enticing away the claimant’s customers.

In Jones v Lipman [1962] 1 WLR 832, Lipman sold land to Jones, but before completion of the contract for sale transferred the land to a company of which he and a nominee were the sole shareholders and directors. Russell J ordered speciT c performance of the contract for sale against Lipman and the company. It was accepted that an order for speciT c performance could be made against Lipman because he was in e ̂ective control of the property (see 5.3.8) but Russell J went on to say, perhaps with unnecessary mysticism, that:

C e defendant company is the creature of the T rst defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity.

For another example see Albert Locke (1940) Ltd v Winsford Urban District Council (1973) 71 LGR 308.



It is clearly irrelevant that the entities used to evade the obligations in these cases were com-panies. In Gilford Motor Co Ltd v Horne, for example, the court would have come to exactly the same conclusion if the competing business had been in the name of Mrs Horne personally rather than in the name of J M Horne and Co Ltd. So these cases do not represent a special doctrine of company law. In both Gilford Motor Co Ltd v Horne and Jones v Lipman the court made orders against both the individual defendant and the company, thus recognising rather than ignoring the company’s separate personality.

C e court’s ability to prevent persons evading their obligations by transferring their property to others is also illustrated by Trustor AB v Smallbone (No. 2) [2001] 1 WLR 1177, discussed in 16.9.1, and by cases concerning freezing injunctions. A freezing injunction prohibits a defendant in legal proceedings from disposing of assets which could be used to meet any award of dam-ages in the proceedings. To prevent a defendant avoiding the e ̂ect of a freezing injunction by putting assets into the ownership of companies, the court will extend the injunction to cover assets owned by companies controlled by the defendant, and will similarly extend the scope of support-ing orders requiring the defendant to disclose information (Re a Company [1985] BCLC 333) or for the appointment of a receiver (International Credit and Investment Co (Overseas) Ltd v Adham [1998] BCC 134). Re H (Restraint Order: Realisable Property) [1996] 2 All ER 391 is a similar case involving seizure of the proceeds of alleged criminal activity.

C e cases on freezing injunctions are not concerned with a special rule of company law. Re a Company [1985] BCLC 333, for example, was concerned with a defendant’s assets transferred to both companies and trusts. See also per Laws LJ in Re K [2005] EWCA Crim 619, [2006] BCC 362, at [23].

It is the use of a company by its controller to evade the controller’s obligations which can be dealt with by ordering the company to comply with the controller’s obligations. If a company which is under an obligation has its assets removed from it by its controller, the courts recognise the com-pany’s separate personality and refuse to order the controller to return the assets to the company or hand them over to the person owed the obligation, at the instance of that person. For example, if a company is sued for damages for a wrong it has committed and the claimant alleges that the company’s controller has deliberately ensured that the company has no money to pay any damages which may be awarded, the court will not make the controller liable directly to the claimant for the damages: the wrong was done by the company and only the company can be sued for it (B G Preeco I (PaciJ c Coast) Ltd v Bon Street Holdings Ltd (1989) 60 DLR (4th) 30; Yukong Line Ltd v Rendsburg Investments Corporation (No. 2) [1998] 1 WLR 294; Ord v Belhaven Pubs Ltd [1998] 2 BCLC 447). It is possible that directors of a company who have removed its assets so as to defeat claims against it may be liable to the company, either for breaching their duty to act within powers (CA 2006, s 171) or under the wrongful trading provisions of the Insolvency Act 1986, s 214 (see 16.5 and 20.12). However, this is a matter between the company and the directors, not between the directors and the person whose claim is against the company. In Creasey v Breachwood Motors Ltd [1993] BCLC 480 the directors of a company which was defending a claim by a former employee transferred all its assets to another company, of which they were also directors and shareholders, leaving the original company with nothing to pay the claim. C e deputy High Court judge substituted the transferee company as the defendant to the claim, thus making one person liable to defend a claim brought to remedy a wrong done by another person. C is was done so as to avoid the cost of separate pro-ceedings between the original defendant company and its directors and the transferee company for the recovery of money to pay for any damages the claimant might be awarded. In Ord v Belhaven Pubs Ltd the Court of Appeal held that Creasey v Breachwood Motors Ltd was wrongly decided. Hobhouse LJ said, at p 458, that the case ‘represents a wrong adoption of the principle of piercing the corporate veil’. It is, however, defended for its cost saving by D Bromilow, ‘Creasey v Breachwood Motors: mistaken identity leads to untimely death’ (1998) 19 Co Law 198.

C e colourful epithets of ‘sham’, ‘cloak’ and ‘mask’ seem to be used in these cases:



to indicate that a company is completely controlled by a person who can therefore use it for (a) his or her own purposes and is able to make it comply with court orders, andto show that there was some impropriety in the use of the company which justiT es the court (b) in making an order to override a transaction which is otherwise legally e ̂ective (see Lisa Linklater, ‘ “Piercing the corporate veil”—the never-ending story’ (2006) 27 Co Law 65). C e impropriety is that the company has been used to evade its controller’s legal obligations. C is is sometimes described as ‘abuse of the corporate form’ (see C M Schmittho ̂, ‘Salomon in the shadow’ [1976] JBL 305).

In Re G (Restraint Order) [2001] EWHC 606 (Admin), [2002] STC 391, the judge referred, at [11], to a company which ‘has no genuine separate existence from the defendant, and is used by him as a device for fraud’.

If control of a company has been used by a defendant to evade obligations, the court may order the company as well as the defendant to comply with the obligations. It is the controller’s use of the company to avoid the controller’s obligations which can be dealt with by an order requiring the company to comply with those obligations. However, characterisation of a company as a sham can-not be invoked to justify requiring the company to fulT l its controller’s obligations if the company has not been used to evade those obligations. For example, in Clarkson Co Ltd v Zhelka (1967) 64 DLR (2d) 457 the court refused to transfer a company’s property to the trustee of its bankrupt con-troller for the beneT t of the bankrupt’s creditors, because it was not shown that the bankrupt had ever used the company to evade his own obligations.

5.3.8 control of a company’s propertyIn some circumstances, a court may require a person to deal with property over which that person has control even though that person does not have legal title to it. C e fact that the person con-trols a company which owns the property may be enough to put the property within the person’s control.

For example, a person who is a party to legal proceedings and has ‘control’ of relevant docu-ments may be ordered to disclose them and allow inspection of them (Civil Procedure Rules 1998, Part 31, particularly r 31.8). C e court may recognise that the requisite degree of control exists where the document belongs to a company controlled by the person ordered to give disclosure, because the court may recognise that a company cannot prevent a person who controls it deal-ing with its documents (Dallas v Dallas (1960) 24 DLR (2d) 746; see further Lonrho Ltd v Shell Petroleum Co Ltd [1980] 1 WLR 627 and Re Tecnion Investments Ltd [1985] BCLC 434, in which it was found that the requisite degree of control was not present).

Another example is where a court orders speciT c performance of a contract of sale of property which is controlled by but not owned by the defendant. Again the requisite degree of control may be found where the property is owned by a company controlled by the defendant (Elliott v Pierson [1948] Ch 452; Jones v Lipman [1962] 1 WLR 832).

In Littlewoods Mail Order Stores Ltd v Commissioners of Inland Revenue [1969] 1 WLR 1241 Littlewoods had spent money acquiring a T xed asset (the freehold of its headquarters building) for a wholly owned subsidiary. It claimed that this was a revenue expenditure for the use of property owned by another (and so deductible from income when computing taxable proT ts) rather than capital to be employed in its trade (which was not deductible), but the Court of Appeal rejected the claim. Sachs LJ said, at p 1256:

[C e money] was clearly expended for the purpose of acquiring a capital asset which happened to have been put into the ownership of [the subsidiary]. It is thus in truth expenditure of a capital nature to secure the advantage of an enduring beneT t.



Karminski LJ said, at p 1256:

It is necessary . . . to ask . . . who really beneT ted from getting hold of the freehold. To that in my view there can be only one answer, that it is Littlewoods and not [the subsidiary].

Both judges clearly assumed that the parent company would use its control over the subsidiary to ensure that the freehold was held for its beneT t. Lord Denning MR said, at p 1254, that he declined to treat the subsidiary as ‘a separate and independent entity’ and held that Littlewoods had acquired the freehold. C e majority of the court, though, showed that it was unnecessary to take the drastic step of depriving the subsidiary of its property and giving that property to its par-ent: it was su= cient to accept that buying a capital asset for another to be held for one’s own beneT t amounted to non-deductible capital expenditure. Similarly in R v MerBan Capital Corporation Ltd [1985] 1 CTC 1 a company paid interest on a loan to its wholly owned subsidiary which was made so that the subsidiary could acquire assets and it was held that the interest could be deducted from the parent company’s taxable income because it was paid for the holding company’s business purposes. C e fact that the revenue authorities ended up gaining tax in Littlewoods Mail Order Stores Ltd v Commissioners of Inland Revenue and losing it in R v MerBan Capital Corporation Ltd illustrates that the distinction between income and capital is of crucial importance for the purposes of income tax, which taxes one but not the other.

In Revlon Inc. v Cripps and Lee Ltd [1980] FSR 85, Revlon Inc. was the American parent of an international group of companies. Trade marks used by the companies had been assigned to Revlon Suisse SA, which was the wholly owned subsidiary of a wholly owned subsidiary of Revlon Inc. Under United Kingdom trade marks legislation Revlon Suisse was registered in the UK as the ‘proprietor’ of a trade mark and claimed that the defendant had infringed it by bringing into the UK goods to which that mark had been applied by Revlon Inc. in the USA. Buckley LJ, at p 107, said that Revlon Suisse held the trade marks for the purposes of the trade carried on by companies in the group and so had impliedly consented to Revlon Inc.’s use of the mark on its goods, which was a use ‘in relation to goods connected in the course of trade with the proprietor’, which was deemed by the Trade Marks Act 1938, s 4(3), not to be an infringement. (C e law on trade marks has since been changed and there is now no provision equivalent to s 4(3) of the 1938 Act.) His Lordship said, at p 105:

Since, however, all the relevant companies are wholly owned subsidiaries of [Revlon Inc.], it is undoubted that the mark is, albeit remotely, an asset of Revlon and its exploitation is for the ultimate beneT t of no one but Revlon. It therefore seems to me to be realistic and wholly justiT able to regard [Revlon Suisse] as holding the mark at the disposal of Revlon and for Revlon’s beneT t . . . . C is view does not, in my opinion, constitute what is sometimes called ‘piercing the corporate veil’; it recognises the legal and factual position resulting from the mutual relationship of the various companies.

5.3.9 acknowledgement of connections between a company and its members, directors or other personsIn a large number of cases, a court determines the character of a company’s status or legal relation-ships by reference to persons connected with the company. Someone adopting a narrow view of the e ̂ect of separate personality would not regard these cases as liP ing the veil but someone with a wider view of the e ̂ect of separate personality would.

Whilst the courts in this situation are undeniably looking at the actions and intentions of per-sons other than the company, it is submitted that this is not a denial of corporate personality, but a recognition of it. C e courts are trying to discover the true expression of that personality and, being conscious of the necessary limitations attaching to an artiT cial entity, are looking to the company’s controllers to determine how the company expresses its independent personality.



By far the most important example of using information about persons connected with a com-pany to determine the character of the company’s acts is when a human being is identiT ed with the company and the human’s knowledge, actions, criminal intent or other physical or mental attributes are taken to be those of the company. (See 19.8.)

It is a fundamental principle of the proper administration of justice that an individual who is a party to legal proceedings should not be a member of a tribunal which deals with those proceed-ings. C is is naturally extended to prevent the trial of legal proceedings by an individual who, though not a party, has an interest in the proceedings. In order to disqualify a person because of an interest there is no need to prove actual bias, because disqualiT cation is required to remove the appearance of bias, and the harm which that would do to public conT dence in the legal system. According to the Court of Appeal in Taylor v Lawrence [2002] EWCA Civ 90, [2003] QB 528, at [60], the test of bias is as follows:

C e court must T rst ascertain all the circumstances which have a bearing on the suggestion that the judge was biased. It must then ask whether those circumstances would lead a fair-minded and informed observer to conclude that there was a real possibility that the tribunal was biased.

As the principal reason for holding shares in a company is to beneT t T nancially from the com-pany’s activities, this rule means that a shareholder in a company cannot judge a case in which the company is a party. C us it was wrong for Lord Cottenham LC to hear an appeal in a case brought by the Grand Junction Canal Co (a statutory company) at a time when he held shares in that com-pany (Dimes v Grand Junction Canal Co. (1852) 3 HL Cas 759). An exception may be made where the judge’s shareholding is so small that it is incapable of a ̂ecting his or her decision one way or the other (Locabail (UK) Ltd v BayJ eld Properties Ltd [2000] QB 451 at p 473). So in Weatherill v Lloyds TSB Bank plc (2000) LTL 4/10/2000 it was unnecessary for the judge to abandon hearing a case when he discovered that he owned 570 of the defendant company’s 5.5 billion shares (which he immediately sold). Normally the type of apparent interest which leads to disqualiT cation is a T nancial interest, but in R v Bow Street Metropolitan Stipendiary Magistrate, ex parte Pinochet Ugarte (No. 2) [2000] 1 AC 119 the House of Lords held that the rule also disqualiT es someone whose connection with a pressure group which is a party to proceedings (in this case the connec-tion was as director and chairperson of a company which ran the group’s charitable activities) gave a su= cient appearance of bias to warrant disqualiT cation.

C e following three cases are further examples of information about persons connected with a company being used to characterise the company’s status or legal relationships.

In Newell v Hemingway (1888) 53 JP 324 and Trebanog Working Men’s Club and Institute Ltd v Macdonald [1940] 1 KB 567 the fact that the members of a company, by their membership, con-stituted themselves a members’ club determined that when members paid for their drinks in the club it was not a sale by retail by the company such as to be subject to the law then in force which required retailers of intoxicating liquor to purchase excise duty licences.

In e Abbey Malvern Wells Ltd v Ministry of Local Government and Planning [1951] Ch 728 the fact that, by virtue of provisions of its articles, the only persons who could be directors of the com-pany were the trustees of a deed which required them to operate the company for charitable pur-poses, determined that land held by the company was held for charitable purposes and so exempt from a now-abolished land tax.

Information about a subsidiary company’s holding company and the way it T nances its sub-sidiary may be taken into account in determining whether the subsidiary is a ‘responsible’ person to take an assignment of a lease (Re Greater London Properties Ltd’s lease [1959] 1 WLR 503). In R (Healy) v Vehicle Inspectorate [2001] RTR 253 a company acquired a vehicle testing business previously operated by a partnership. C e Vehicle Inspectorate withdrew the company’s authorisa-tion to perform MoT tests, taking into account incidents occurring before and aP er the transfer of the business, which had been conducted by the same individual throughout. It was held that



there was nothing objectionable in the Inspectorate’s decision-making. But in R v Crown Court at Warrington, ex parte RBNB [2002] UKHL 24, [2002] 1 WLR 1954, it was held to be wrong for the Crown Court to conclude that an individual was not a T t and proper person to hold a licence to sell intoxicating liquor merely because no information was available about who were the beneT cial owners of the shares in the company which employed the individual.

C ere are other examples of when, as in R v Crown Court at Warrington, ex parte RBNB, it is not appropriate to consider a company’s members when determining its legal status. In Canada the amount of local tax payable on the occupation of land depends on whether the occupier is using it for the purposes of a business. C e key characteristic of a business, for the purposes of this tax, is that its preponderant purpose is the making of a proT t. C ere has been di= culty in determining the correct rate of tax when land is occupied by a non-proT t-making company providing its members with facilities for the purposes of their own businesses, for example, where market premises are owned by a non-proT t company whose members are the T rms which trade on the premises. It has now been held by the Ontario Court of Appeal, disagreeing with an earlier view by a lower Ontario court, that if the predominant purpose of a company which occupies land is not to make proT ts for itself but to enable its members to make proT ts then the company is not itself carrying on a busi-ness on the land and should not be assessed at the business rate (Toronto Stock Exchange v Regional Assessment Commissioner, Region No. 9 (1996) 136 DLR (4th) 362).

5.3.10 exercise of judicial discretionIf a court has a discretion whether to make an order in relation to a company then it has a duty to consider all relevant matters. One of the matters which the court may take into consideration is information about persons connected with the company. Someone adopting a narrow view of the e ̂ect of separate personality would not regard this as liP ing the veil, but someone with a wider view of the e ̂ect of separate personality would.

In Merchandise Transport Ltd v British Transport Commission [1962] 2 QB 173, Merchandise Transport Ltd had applied, under the statutory system then in force for licensing road haulage, for a licence to operate over 100 vehicles as a public carrier. C e statute gave the ‘licensing authority’ (in fact, one man) discretion whether to grant a licence or not. In deciding to refuse the licence, the licensing authority took into account the fact that Merchandise Transport Ltd was the wholly owned subsidiary of a large company manufacturing furniture, Harris Lebus Ltd, and the vehicles were at the time owned by the manufacturing company and used to deliver its products. C e hold-ing company could not obtain a licence to use these vehicles for public carrier business on return journeys aP er delivering its goods because it could a ̂ord to charge lower rates for such journeys than full-time public carriers whom the licensing system was intended to protect. It was clear that aP er being transferred to the subsidiary the vehicles would continue to be used to deliver the hold-ing company’s products and would only be available for public carrier business on return journeys for which low charges would be made. Devlin LJ said, at pp 201–2:

C e reasoning of the licensing authority is said to conc ict with [the proposition that a company is a legal entity distinct from its shareholders]. I cannot see that it does. If he had refused a licence to Merchandise Transport on the ground that it had no legal existence apart from Harris Lebus Ltd and that the latter ought to have applied themselves, that would be wrong . . . .

But the fact that two persons are separate in law does not mean that one may not be under the control of the other to such an extent that they constitute one commercial unit . . . .Whenever a licensing authority is satisT ed that that sort of relationship exists, and that the dominant party is using it to obtain contrary to the intent of the Act an advantage which he would not otherwise get, he is entitled, if not bound, to exercise his discretion so as to ensure that the scheme of the Act is complied with in the spirit as well as in the letter.



For other examples of the exercise of judicial discretion, see Re Bugle Press Ltd [1961] Ch 270 and Esso Standard (Inter-America) Inc. v JW Enterprises Inc. (1963) 37 DLR (2d) 598, discussed in 8.8.2.4. Another example is Burnet v Francis Industries plc [1987] 1 WLR 802, in which the court exercised its discretion to stay execution of a judgment obtained against a company pending deter-mination of a separate claim against the judgment creditor made by the company’s parent com-pany. (See also Canada Enterprises Corporation Ltd v MacNab Distilleries Ltd [1987] 1 WLR 813.) In Atlas Maritime Co SA v Avalon Maritime Ltd (No. 1) [1991] 4 All ER 769 one company had used a wholly owned subsidiary to conduct a particular business operation which became the subject of legal proceedings against the subsidiary. In those proceedings the subsidiary’s assets were made subject to a freezing injunction, and the court refused to allow the subsidiary to repay to the parent company the money which it had provided as working capital for the venture. Neill and Staughton LJJ both said that this was not ‘piercing’ the corporate veil (though Stocker LJ did use that phrase). Staughton LJ said (at p 780) that the relationship of holding and subsidiary company was a factor to be taken into account in exercising the court’s discretion and preferred to describe this as ‘liP ing’ the corporate veil. It was held that the subsidiary was not an agent of the parent company.

It is not always proper to take into account the membership of a company when exercising a discretion in relation to that company. Pioneer Laundry and Dry Cleaners Ltd v Minister of National Revenue [1940] AC 127 concerned a Canadian tax statute which gave the Minister discretion to decide how much a taxpayer could deduct from income for depreciation of T xed assets when com-puting taxable proT t. C e Minister decided that Pioneer Laundry and Dry Cleaners Ltd could not deduct any depreciation for some of its assets because they had previously been owned by another company with the same shareholders and that company had already been allowed 100 per cent depreciation on them. C e Privy Council held that this was wrong, saying (per Lord C ankerton), ‘C e taxpayer is the company, and not its shareholders’. Lord C ankerton said that the Minister was wrong ‘to disregard the separate legal existence of the appellant company and to inquire as to who its shareholders were and its relation to its predecessors’. It is submitted that taking into account the company’s membership in exercising the discretion did not disregard the company’s separate personality. But the Minister’s erroneous reason for taking the membership into account, that the members were the taxpayers rather than the company, did ignore the company’s separate personality.

5.3.11 standing to claim judicial reviewA claim for judicial review may be made only if the claimant has a su= cient interest in the matter to which the claim relates (Supreme Court Act 1981, s 31(3)). It has been held that a company may make a claim if its members have a su= cient interest, at least where the company was formed to promote that interest (R v Hammersmith and Fulham London Borough Council, ex parte People Before ProJ t Ltd (1981) 80 LGR 322; R v Secretary of State for the Environment, ex parte Rose eatre Trust Co [1990] 1 QB 504). In the T rst of these cases People Before ProT t Ltd was held to be capable of making a claim, but the claim failed; in the second case Rose C eatre Trust Co was held not to be capable of making a claim because none of its members had a su= cient interest.

For the ability of a member of a company to claim judicial review on behalf of the company see 18.4.3.5.

5.3.12 groups of companies

5.3.12.1 - e DHN caseC ere is controversy over whether the separate personalities of companies in a group of companies may be ignored. On one side is the formalistic approach that each company in a group is a separate



entity, exempliT ed by the Court of Appeal’s judgment in e Albazero [1977] AC 774. e Albazero concerned a cargo of crude oil which Concord Petroleum Corporation, a wholly owned subsidiary of Occidental Petroleum Corporation, had consigned on a ship for shipment from Venezuela to Europe. During the voyage, the consigning company, Concord, transferred ownership of the cargo to another wholly owned subsidiary of Occidental Petroleum Corporation. AP er the transfer of ownership the ship and cargo were totally lost. Concord sued the shipowner for the loss. C e ship-owner argued that the true loser of the cargo was the company to which ownership had been trans-ferred and only that company could sue for the loss. (Proceedings could not be restarted with that company as claimant because the limitation period had expired.) At T rst instance, Concord sub-mitted that it and the company to which the cargo had been sold should be treated as one because they were both wholly owned subsidiaries of the same company. C is argument was rejected. In the Court of Appeal, Roskill LJ said, at p 807, that it was a fundamental principle of English law:

long established and now unchallengeable by judicial decision . . . that each company in a group of com-panies . . . is a separate legal entity possessed of separate legal rights and liabilities so that the rights of one company in a group cannot be exercised by another company in that group even though the ultimate beneT t of the exercise of those rights would enure beneT cially to the same person or corporate body irrespective of the person or body in whom those rights were vested in law.

C e argument was not pursued in the House of Lords where Concord succeeded (as it had at T rst instance and in the Court of Appeal) on the alternative argument that it was an established rule of maritime law that the consignor of cargo could sue for its loss regardless of who owned the cargo.

However, a year aP er the Court of Appeal gave judgment in e Albazero, a di ̂erently consti-tuted Court of Appeal took an entirely di ̂erent approach in DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852. C is case concerned the long-standing prob-lem of compensation on the compulsory purchase of land where the land has been owned by one company in a group but the business conducted on the land has been the business of another company in the group which thus occupied the land as tenant or licensee. Unfortunately com-panies in this situation do not usually draw up formal long-term leases and so until the DHN case it was thought that the operating company would not be entitled to compensation for disturbance of its business because it could have been evicted from the property at short notice anyway (Melias Ltd v Manchester Corporation (1972) 23 P & CR 380). Smith, Stone and Knight Ltd v Birmingham Corporation [1939] 4 All ER 116 (see 5.3.6.2) was an exceptional case in which it was found that the business carried on by a subsidiary of the land-owning company was actually the business of the land-owning company, which could therefore be compensated for its disturbance.

In the DHN case, DHN Food Distributors Ltd was the holding company in a group of three companies. One wholly owned subsidiary, Bronze Investments Ltd, owned freehold land which was used in the business of the holding company but Bronze did not itself carry on business. C e other subsidiary owned the vehicles used in the holding company’s business. On the compulsory purchase of the land, the holding company claimed compensation for disturbance of its business. C e Court of Appeal upheld the claim. Lord Denning MR said, at p 860:

C ese subsidiaries are bound hand and foot to the parent company and must do just what the parent com-pany says . . . . C is group is virtually the same as a partnership in which all the three companies are part-ners. C ey should not be treated separately so as to be defeated on a technical point. C ey should not be deprived of the compensation which should justly be payable for disturbance. C e three companies should, for present purposes, be treated as one, and the parent company, DHN, should be treated as that one. So DHN are entitled to claim compensation accordingly.

It is remarkable, that, in a single paragraph of his judgment, Lord Denning could describe the subsidiaries both as ‘bound hand and foot to the parent company’ and as ‘partners’ of the parent company. In Australia the case has been interpreted as meaning that the separate personalities



of companies in a group may be ignored only if ‘there is in fact or in law a partnership between’ them (Young J in Pioneer Concrete Services Ltd v Yelnah Pty Ltd (1986) 5 NSWLR 254 at p 267). Partnership is the relation which subsists between persons carrying on a business in common with a view of proT t (Partnership Act 1890, s 1(1)). Usually, di ̂erent companies in a group carry on di ̂erent businesses and, thus, would not be in partnership. In the DHN group there was only one business and two of the three companies in the group did nothing but own the business’s T xed assets. As Go ̂ LJ said in the DHN case, at p 861:

. . . this is a case in which one is entitled to look at the realities of the situation and to pierce the corporate veil. I wish to safeguard myself by saying that so far as this ground is concerned, I am relying on the facts of this particular case. I would not at this juncture accept that in every case where one has a group of companies one is entitled to pierce the veil, but in this case the two subsidiaries were both wholly owned; further, they had no separate business operations whatsoever.

In Woolfson v Strathclyde Regional Council 1978 SC (HL) 90, the House of Lords said that the crucial factor in the DHN case was that the company operating the business had complete con-trol over the land-owning company (which was its wholly owned subsidiary and had the same dir ectors). In Woolfson’s case, Mr Woolfson owned compulsorily purchased premises on which a business was carried on by M and L Campbell (Glasgow) Ltd. Mr Woolfson owned 999 shares in the company, the other one share was owned by his wife but not as nominee for him. C e company also carried on business on adjacent premises which were compulsorily purchased from Solfred Holdings Ltd, whose shares were also owned by Mr and Mrs Woolfson. Lord Keith of Kinkel said, at p 96: ‘Here, on the other hand, the company that carried on the business, Campbell, has no sort of control whatsoever over the owners of the land, Solfred and Woolfson’. C is was held to distin-guish the case from the DHN case so that Woolfson and Solfred were not entitled to compensation for business disturbance.

C e fact that a company and its wholly owned subsidiary both carried on businesses and had separate boards of directors with only one director in common was su= cient to distinguish the situation in Stewarts Supermarkets Ltd v Secretary of State [1982] NI 286 from the DHN case.

Lord Keith in Woolfson v Strathclyde Regional Council also said that he had ‘some doubts’ about whether the Court of Appeal in the DHN case ‘properly applied the principle that it is appropriate to pierce the corporate veil only where special circumstances exist indicating that [it] is a mere facade concealing the true facts’. It is, of course, highly unlikely that Lord Denning MR had in mind any such principle as limiting the circumstances in which he could pierce the corporate veil. Lord Keith’s ‘principle’ also seems to depend on his (unstated) view of what constitutes piercing the veil. His Lordship’s remark would make sense only if cases in which the court has found an agency rela-tionship are taken to be cases in which the corporate veil is a facade concealing the true facts.

It seems that the DHN case has not been enthusiastically received and developed by the courts and this leaves undesirable uncertainty about which cases it will be applied to in the future. It has been applied in a case of criminal injury compensation in Northern Ireland (Munton Brothers Ltd v Secretary of State [1983] NI 369, see G Dee, ‘LiP ing the veil in Ulster’ (1986) 7 Co Law 248) but its application is apparently not limited to piercing the veil in order to award compensation. In Lewis Trusts v Bambers Stores Ltd [1983] FSR 453 May and Dillon LJJ said they would have liP ed the corporate veil so as to make a parent company liable for its subsidiary’s infringement of copyright: however, it was unnecessary to do so in the case before them.

C e most interesting point about the reception of the DHN case is that it has not been applied in the most obvious way, that is, to make one company in a group liable for the debts of another com-pany in the group: a parent company is not responsible for the debts of its subsidiary (Re Southard and Co Ltd [1979] 1 WLR 1198 per Templeman LJ at p 1208) even if it has in the past expressed in a comfort letter a policy of supporting the subsidiary (Kleinwort Benson Ltd v Malaysia Mining Corporation Bhd [1989] 1 WLR 379; Re Atlantic Computers plc, National Australia Bank Ltd v



Soden [1995] BCC 696). In Reed v Nova Securities Ltd [1985] 1 WLR 193, Lord Templeman said, at p 201: ‘. . . the theoretical independent existence of every corporation enables a group of companies to escape liability at common law for the losses of an individual member of the group’.

C e importance of the DHN case was considerably reduced by a subsequent comment on it by the Court of Appeal in Adams v Cape Industries plc [1990] Ch 433. At p 536, the court said:

C e relevant parts of the judgments in the DHN case must, we think, . . . be regarded as decisions on the relevant statutory provisions for compensation, even though these parts were somewhat broadly expressed, and the correctness of the decision was doubted by the House of Lords in Woolfson v Strathclyde Regional Council.

See also 5.3.12.3.

5.3.12.2 Enterprise entityAnother approach to piercing the veil in groups is the idea that the law should have regard to the business enterprise rather than the individual company as an entity. C is idea is particularly associ-ated with A A Berle Jr, ‘C e theory of enterprise entity’ (1947) 47 Colum L Rev 343. See also C M Schmittho ̂, ‘C e wholly owned and the controlled subsidiary’ [1978] JBL 218 and N C Sargent, ‘Corporate groups and the corporate veil in Canada’ (1988) 17 Man LJ 155. C e idea was taken up by the Ontario Court of Appeal in Manley Inc. v Fallis (1977) 38 CPR (2d) 74, in which the defend-ant had set up in business in competition with the plainti ̂ company. C is would have been a breach of duty if the defendant had been a senior employee of the plainti ̂ company but in fact he was a senior employee of a wholly owned subsidiary of the plainti ̂ and the business he had started was not in competition with that subsidiary’s business. C e court said, at p 76:

In our view, it would undermine the requirement of T delity to allow an employee to successfully argue that, while his activities may have injured the parent company of his employer, they did not in fact injure his employer.

C is is a case where the court is not precluded from liP ing the corporate veil, and, in e ̂ect, regarding the closely related respondent companies as essentially one trading enterprise, in the interests of the a= liated companies, in a circumstance where the refusal to do so would allow the appellant to escape the conse-quences of his breach of a T duciary trust.

In both Littlewoods Mail Order Stores Ltd v Commissioners of Inland Revenue [1969] 1 WLR 1241 and DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852, Lord Denning MR said that the legislative requirement that holding companies must prepare group accounts was an example of the law dealing with the enterprise entity. However, Mason J in the High Court of Australia, in Industrial Equity Ltd v Blackburn (1977) 137 CLR 567, at pp 577–8, said:

. . . it can scarcely be contended that the provisions of the [legislation] operate to deny the separate legal personality of each company in a group . . . .

Group accounts are an additional requirement; the holding company is still obliged to lay before its shareholders in general meeting its proT t and loss account and balance sheets [showing its separate T nan-cial position].

See further F G Rixon, ‘LiP ing the veil between holding and subsidiary companies’ (1986) 102 LQR 415 and Sharrment Pty Ltd v O? cial Trustee in Bankruptcy (1988) 82 ALR 530 at pp 552–3.

Since the DHN case, further attempts to rely on the enterprise entity theory in England have been unsuccessful. In Bank of Tokyo Ltd v Karoon [1987] AC 45, Bank of Tokyo Ltd carried on a banking business in London, and its wholly owned subsidiary, Bank of Tokyo Trust Co (BTTC), carried on a banking business in New York. Mr Karoon was a customer of both banks. He com-plained that details of his account with BTTC had been disclosed by BTTC to its parent company



without his permission in breach of a bank’s duty of conT dence, and sued BTTC in the New York courts for damages. C e disclosure was made for the purposes of legal proceedings in the High Court in London to which Mr Karoon and the parent company were parties. C e parent company sought an order restraining the action against its subsidiary. Robert Go ̂ LJ said, at p 64:

[Counsel for the Bank of Tokyo Ltd] suggested beguilingly that it would be technical for us to distinguish between parent and subsidiary company in this context; economically, he said, they were one. But we are concerned not with economics but with law. C e distinction between the two is, in law, fundamental and cannot here be bridged.

C e same approach was taken by the Court of Appeal in Adams v Cape Industries plc [1990] Ch 433 at pp 532–9.

In Newton-Sealy v Armorgroup Services Ltd [2008] EWHC 233 (QB), LTL 21/2/2008, the claim-ant had been injured in the course of his employment with one company in a group. As that com-pany was incorporated in Jersey, its contract of employment could exclude liability for personal injury. C e court struck out a claim that the contract of employment was also with other com panies in the group incorporated in England and Germany, where such liability cannot be excluded. Although the employee’s contract was with the Jersey company only, the other companies dealt with him day to day. C e court accepted it was arguable that these day-to-day dealings created a relationship of proximity or assumption of liability, so that the other companies had a duty of care in the law of negligence.

EC competition law can treat a parent company and its subsidiaries as an economic unit. C e rules on competition in arts 81 to 86 of the EC Treaty are ‘rules applying to undertakings’ and the Court of First Instance has held that the use of the word ‘undertakings’ means that the rules are ‘aimed at economic units which consist of a unitary organisation of personal, tangible and intan-gible elements which pursues a speciT c economic aim on a long-term basis’ (Shell International Chemical Co Ltd v Commission (Case T-11/89) [1992] ECR II-757 at para 311). Where a group of companies forms an ‘undertaking’, the whole undertaking can be found to have broken the competition rules. Even so, because a group of companies does not have legal personality, the Commission must select a speciT c company in the group to be the addressee of its Decision and to be responsible for payment of any penalty (see Provimi Ltd v Roche Products Ltd [2003] EWHC 961 (Comm), [2003] 2 All ER (Comm) 683, at [6]). Where the companies in a group form one undertaking, agreements between them, for example, T xing prices, cannot be anti-competitive agreements contrary to art 81(1) of the EC Treaty, because they are not agreements ‘between undertakings’, only agreements within one undertaking (Centrafarm BV v Sterling Drug Inc. (Case 15/74) [1974] ECR 1147; Viho Europe BV v Commission (Case C-73/95 P) [1996] ECR I-5457). In Imperial Chemical Industries Ltd v Commission (Case 48/69) [1972] ECR 619 it was held that anti-competitive behaviour of a subsidiary company within the Community, acting on the instructions of its parent company outside the Community, could be attributed to the parent company so as to bring the parent company within the jurisdiction of the Commission and allow the Commission to T ne it: taking extraterritorial jurisdiction in this way was seen by the European Court of Justice as necessary for the e ̂ective enforcement of competition law. C is decision in EC competition law may be contrasted with Adams v Cape Industries plc, in which the English Court of Appeal held that the fact that a subsidiary of an English company was present in the jurisdiction of a Texas court did not mean that the parent company was present in that jurisdiction, so that the parent company was not liable for a judgment which the Texas court had given against the subsidiary.

5.3.12.3 Challenging arrangements of aB airsUsually, the whole point of using a company to conduct transactions is to separate those trans-actions from other a ̂airs of the company’s owners so that liabilities incurred in the course of those transactions are the liabilities of the company rather than of its owners, who have such



limited liability for the company’s a ̂airs as legislation permits. Parliament has made limited com-panies available for this purpose because it believes that it will encourage economic activity. Many demands for the separate personality of companies to be ignored are simply attempts to challenge advantageous uses of companies to limit liability. Since Salomon v A Salomon and Co Ltd [1897] AC 22, the courts consistently reject such challenges. In Adams v Cape Industries plc [1990] Ch 433 the Court of Appeal said, at p 544:

. . . we do not accept as a matter of law that the court is entitled to liP the corporate veil as against a defend-ant company which is the member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company. Whether or not this is desirable, the right to use a corporate structure in this manner is inherent in our corporate law.

It is a feature of company law that it permits a group of companies to be arranged so as to separate liabilities for the various activities of the group. C e unlikelihood of a court ever overriding such an arrangement and transferring liability from a company which incurred it to a company more able to meet it is demonstrated by the Canadian case of Bank of Montreal v Canadian Westgrowth Ltd (1990) 72 Alta LR (2d) 319. C e plainti ̂ sought to make a parent company liable on a contract entered into by its wholly owned subsidiary, because: (a) the o= cers and directors of the two com-panies were identical and meetings of their two boards were held concurrently; (b) the subsidiary was funded entirely by the parent and its assets were purchased with money loaned by the parent interest free and with no terms for repayment; (c) the audits for both companies were performed by the same auditor and they had identical T nancial years; (d) most of the dealings and correspond-ence concerning the contract were with the parent’s personnel and correspondence was on the parent’s headed paper; (e) the parent provided management services to the subsidiary without cost. Brennan J said, at p 327:

In the present case there was no express contract of agency between [parent and subsidiary], and I am not prepared to T nd an implied contract of agency from the facts before me . . . .

In my view the facts relied upon by the plainti ̂ to support its argument for a piercing of the corporate veil do not justify a T nding that [parent and subsidiary] were one and the same and that [the parent] was the de facto contracting party, being the alter ego of [the subsidiary].

With respect to both grounds argued by the plainti ̂ it is my view that the facts relied upon by the plainti ̂ in support thereof are nothing more than one would expect to T nd in the operation of two associated com-panies, and in particular where, as here, [the parent] provided management services for [the subsidiary].

On appeal ((1992) 2 Alta LR (3d) 221) Fraser CJA said, at p 223:

In this case we have a written contract which clearly says it is with one party, [the subsidiary]. In order to T nd that (in some way by agency or otherwise) it is not really with [the subsidiary], it is really with [the parent], one would need pretty clear—possibly overwhelming—evidence of agency or something else. C e evidence which has been pointed out to us is not of that nature.

It is common for a contract of sale to provide that the purchaser can nominate a company to take legal title to the property on completion of the sale. C is in itself does not constitute the nominated company an agent, trustee or partner of the nominator or otherwise justify ignoring the nominated company’s separate personality, even where the purchaser and the nominated company are in the same group of companies (Attorney-General v Equiticorp Industries Group Ltd [1996] 1 NZLR 528).

It is common for each vessel in a merchant shipping c eet to be in the registered ownership of a separate company—known as a ‘one-ship company’—so as to limit the liability of the c eet owner in respect of each vessel. C e court will not ignore the separate personality of a one-ship company



so as to transfer its liabilities to the c eet owner just because this corporate structure has been used ( e Evpo Agnic [1988] 1 WLR 1090; e Skaw Prince [1994] 3 SLR 379).

5.3.12.4 A new attitude in the Court of Appeal?In Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613, [2007] ICR 1539, Maurice Kay LJ (with whom the other members of the court agreed) quoted with approval the words of Lord Denning MR in Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472, at p 1482:

C e answer is, I think, the law today has regard to the realities of big business. It takes the group as being one concern under one supreme control.

In Adelson v Associated Newspapers Ltd [2007] EWHC 3028 (QB), LTL 4/1/2008, a company sought to amend its libel claim by adding a claim for damage to the reputations of two of its subsidiaries, which were not parties to the claim. Eady J refused this application, because one person cannot sue to recover damages for an injury done to another person (see 18.4). Counsel for the company said that, during another application in the proceedings, the Court of Appeal had indicated, during argument but not in its judgment, that it:

might wish to explain or develop the law in some way which would enable a non-trading holding company to recover in defamation proceedings for injury done to the group as a whole . . . or for damage to the reputa-tion of trading subsidiaries (per Eady J at [8]).

However, Eady J said that he had to apply the law as it is and not as it might develop in the future. As the proposed claim was clearly bad, and it could not be said that the law is in a state of c ux, the amendment could not be permitted.

C ese cases may indicate that members of the current Court of Appeal are more in favour of disregarding separate corporate personality in groups of companies than was the court in Bank of Tokyo Ltd v Karoon [1987] AC 45 and Adams v Cape Industries plc [1990] Ch 433. See also the discussion of Conway v Ratiu [2005] EWCA Civ 1302, [2006] 1 All ER 571, at 5.3.13.3, for signs that the court has changed its attitude to ignoring separate corporate personality whenever justice requires.

5.3.13 the search for a general principle

5.3.13.1 Can there be a general principle?C e wide divergence of views on the question of disregarding separate corporate personality reveals a fundamental uncertainty about its nature and e ̂ect. It is highly unlikely that a theory can be found which will reveal that all past cases are consistent. A general incorporation statute such as CA 2006 allows people to create separate legal persons very easily. It has always been feared that this would have unforeseen disadvantages. It has been thought useful to retain the possibility of denying separate personality in order to overcome these disadvantages. Judges such as Lord Denning have favoured the idea that the court should always be free to ignore separate personality. C ey have been conT dent that this freedom will always be used in the interests of justice. Others feel that this leads to undesirable uncertainty and encourages unnecessary litigation because it will not be known whether separate personality will be ignored in any particular case until the matter has been through the courts. C e di ̂erent judicial approaches may be illustrated by two quota-tions. In Littlewoods Mail Order Stores Ltd v Commissioners of Inland Revenue [1969] 1 WLR 1241, Lord Denning MR said, at p 1254, that:

C e doctrine laid down in Salomon v A Salomon and Co Ltd [1897] AC 22 has to be watched very carefully.



In Re Securitibank Ltd (No. 2) [1978] 2 NZLR 136, Richmond P responded, at p 159:

For myself, and with all respect, I would rather approach the question the other way round, that is to say on the basis that any suggested departure from the doctrine laid down in Salomon v A Salomon and Co Ltd should be watched very carefully.

5.3.13.2 FacadeIn Woolfson v Strathclyde Regional Council 1978 SC (HL) 90, at p 96, Lord Keith of Kinkel referred to:

the principle that it is appropriate to pierce the corporate veil only where special circumstances exist indi-cating that [it] is a mere facade concealing the true facts.

Although this dictum is of undeniably high authority, his Lordship did not explain what he meant by piercing the corporate veil or consider many previous cases, so the scope of the principle enun-ciated by his Lordship is not clear.

In Adams v Cape Industries plc [1990] Ch 433, the Court of Appeal said, at p 543:

From the authorities cited to us we are leP with rather sparse guidance as to the principles which should guide the court in determining whether or not the arrangements of a corporate group involve a façade within the meaning of that word as used by the House of Lords in Woolfson v Strathclyde Regional Council. We will not attempt a comprehensive deT nition of those principles.

5.3.13.3 JusticeC e broadest possible principle is that consequences of separate corporate personality may be dis-regarded whenever required by justice. C is principle has been stated, denied and restated by the Court of Appeal over a period of 30 years.

In Re a Company [1985] BCLC 333 it said, at pp 337–8, that ‘the court will use its powers to pierce the corporate veil if it is necessary to achieve justice’. In Adams v Cape Industries plc [1990] Ch 433, the court said, at p 536:

. . . save in cases which turn on the wording of particular statutes or contracts, the court is not free to disre-gard the principle of Salomon v A Salomon and Co Ltd [1897] AC 22 merely because it considers that justice so requires.

In Re Polly Peck International plc (No. 3) [1996] 2 All ER 433, Robert Walker J held that this second statement is a principle of law which is binding on T rst-instance judges. C e same view was taken by Morritt V-C in Trustor AB v Smallbone (No. 2) [2001] 1 WLR 1177.

In Conway v Ratiu [2005] EWCA Civ 1302, [2006] 1 All ER 571, Auld LJ referred, at [75], to:

the readiness of the courts, regardless of the precise issue involved, to draw back the corporate veil to do justice when common sense and reality demand it.

At [78] his Lordship said:

C ere is . . . a powerful argument of principle . . . for liP ing the corporate veil where the facts require it.

Laws LJ, at [186], stated his ‘emphatic agreement’ with this. Sedley LJ said, at [188]:

I recognise that there is an asymmetry between the law’s long-standing insistence on the discrete legal personality of limited liability companies and its willingness to liP the veil, as the expression is, in a case like the present. But it is the latter, not the former, which accords with common sense and justice [in a case such as this].

C eir Lordships did not refer to Adams v Cape Industries plc or any other case on disregarding separate corporate personality, so that their remarks may be regarded as per incuriam and so not authoritative. However, they obviously represent a commonly held judicial view.



C e issue their Lordships were discussing was whether a solicitor who had advised a business-man over a period of 11 months owed a T duciary duty (see 16.3) to him. C e solicitor had carried out the conveyancing of purchase of land by the businessman and had acquired an o ̂-the-shelf company which was nominated as the transferee of the land. C e solicitor claimed that his only T duciary duty was to that company and that it had ended when the conveyancing was completed. Fiduciary duty arises because a relationship of trust and conT dence has come into being, and whether that has happened is a question of fact. C e Court of Appeal held that there was a relation-ship of trust and conT dence between the solicitor and the businessman and so the T duciary duty was owed to the businessman. It is submitted that doing something with a metaphorical corporate veil is irrelevant to that question of fact (see Diamantides v J P Morgan Chase Bank [2005] EWCA Civ 1612, LTL 21/12/2005, at [34]–[35]).

5.3.13.4 Puppets, clones and alter egosIn Aluminum Co of Canada Ltd v Toronto [1944] 3 DLR 609, Rand J, in the Supreme Court of Canada, said, at p 614, that the condition for treating the business of a subsidiary as the business of its parent company, when taxing the parent company’s business income, was that the subsidiary was the ‘puppet’ of the holding company (which in the case then before the court it was not). Lord Denning MR took the view that the separate personality of a company could be ignored if it was the puppet of another person (Littlewoods Mail Order Stores Ltd v Commissioners of Inland Revenue [1969] 1 WLR 1241 at p 1254; Wallersteiner v Moir [1974] 1 WLR 991 at p 1013). ‘Puppet’ seems to mean no more than that the company is under the other person’s control. Other epithets used are that the company is the controller’s ‘clone’ (R v MerBan Capital Corporation Ltd [1985] 1 CTC 1 at p 4) or that the controller is the company’s ‘alter ego’ (Yukong Line Ltd v Rendsburg Investments Corporation (No. 2) [1998] 1 WLR 294 at p 299). (For criticism of the ‘alter ego’ metaphor see 19.8.3.3.) In Adams v Cape Industries plc [1990] Ch 433 the Court of Appeal, at p 543, said that Lord Denning’s dicta in Littlewoods Mail Order Stores Ltd v Commissioners of Inland Revenue and Wallersteiner v Moir could provide little support for a plainti ̂ ’s claim to have the veil disregarded. C is signals that it cannot now be argued that a company’s separate personality should be ignored simply because it is controlled by another person (W D Latimer Co v Dijon Investments Ltd (1992) 12 OR (3d) 415). C e fact that a company is controlled by another person is not enough also to make it that other person’s agent (see 5.3.6.1).

5.3.13.5 Saving legal costsOne e ̂ect of corporate separate personality of which courts are acutely aware is that it can increase the costs of legal proceedings. Sometimes, courts have been willing to ignore separate personality so as to save costs. For example, in Taylor 1993 SLT 375, it was claimed that Mr George Morris and his wife had conducted the a ̂airs of the two companies they owned in a way that did not enable the business transactions of the di ̂erent companies and of Mr Morris himself to be distinguished and separated: there was only one bank account, no annual accounts had been prepared for the com-panies, and the accounting records were incomplete. C e companies were in liquidation and Mr Morris’s estate had been sequestrated (the Scottish equivalent of an adjudication of bankruptcy). It was held that the liquidator of the companies and the trustee of Mr Morris’s estate could enter into a compromise with creditors under which the assets and liabilities of all the entities would be pooled. Similarly, in Re Bank of Credit and Commerce International SA (No. 3) [1993] BCLC 1490 and (No. 10) [1995] 1 BCLC 362 the court approved a compromise under which the assets and liabilities of several companies in liquidation would be pooled because their a ̂airs were so hopelessly inter-twined that it would make no sense to spend vast sums of money and much time in trying to dis-entangle them. In Re H (Restraint Order: Realisable Property) [1996] 2 All ER 391 three individuals had been charged with evasion of more than £100 million of excise duty. It was alleged that prop-erty obtained as a result of or in connection with the o ̂ence was held by two companies controlled



by the accused, and the prosecutor had obtained the appointment of a receiver of that property. On appeal, the Court of Appeal ruled that if the separate personality of the companies were observed then there would be no jurisdiction to seize their property as the companies had not been charged. However, the court accepted that charging the companies would have made the criminal proceed-ings needlessly complex and it a= rmed the appointment of the receiver. C e court disregarded the companies’ separate personality and treated the companies’ property as being the accused’s prop-erty. See also Creasey v Breachwood Motors Ltd [1993] BCLC 480, discussed in 5.3.7.

5.3.14 is veil-piercing necessary?As with Jennings v Crown Prosecution Service [2008] UKHL 29, [2008] 2 WLR 1148, discussed in 5.3.2.3, and Conway v Ratiu [2005] EWCA Civ 1302, [2006] 1 All ER 571, discussed in 5.3.13.3, it is a feature of several of the cases concerned with piercing the corporate veil that separate corporate personality actually has little or nothing to do with the legal questions involved. In both Littlewoods Mail Order Stores Ltd v Commissioners of Inland Revenue [1969] 1 WLR 1241 and Wallersteiner v Moir [1974] 1 WLR 991, Lord Denning MR thought that piercing the veil was required. However, it is not clear what his Lordship’s veil piercing was actually going to do, and in both cases the other members of the Court of Appeal said that veil piercing was not required. In Amalgamated Investment and Property Co Ltd v Texas Commerce International Bank Ltd [1982] QB 84 Lord Denning MR was again alone among the members of the Court of Appeal in believing that the case before them could be solved by treating money owed to one company as being owed to its parent company.

5.3.15 further reading

5.4 corporate law theory

5.4.1 introductionProbably the most important legal feature of a body corporate is its dual nature as both an associ-ation of its members and a person separate from its members. Separate personality is a powerful but perplexing legal concept and has attracted a great deal of argument. C is section o ̂ers a very brief introduction to the main themes of this argument.

5.4.2 criticism of artificial separate personalityC is book adopts what is oP en called the ‘artiT cial-entity’ theory of corporate personality, which is that incorporation creates an artiT cial separate person. C at separate person, though artiT cial (that is, produced by human artiT ce rather than occurring naturally), is treated by the law as being, as

A Samuels, ‘LiP ing the veil’ [1964] JBL 107

M A Pickering, ‘C e company as a separate entity’ (1968) 31 MLR 481

C M Schmitthoff, ‘Salomon in the shadow’ [1976] JBL 305

S Ottolenghi, ‘From peeping behind the cor-porate veil, to ignoring it completely’ (1990) 53 MLR 338

Lord Cooke of Thorndon, ‘A real thing’ in Turning Points of the Common Law (London: Sweet & Maxwell, 1997)

Lord Cooke of Thorndon, ‘Corporate identity’ (1998) 16 C & SLJ 160

C H Tham, ‘Piercing the corporate veil: search-ing for appropriate choice of law rules’ [2007] LMCLQ 22.



far as possible, a person with the same capacity to engage in legal relationships as a human person. It is an important feature of the legal systems of the United Kingdom and many other jurisdictions that they treat artiT cial persons in this way.

C e description of corporate personality as artiT cial has been adopted by some judges. In Trustees of Dartmouth College v Woodward (1819) 17 US (4 Wheat) 518 Marshall CJ said, at p 636:

A corporation is an artiT cial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence . . . . Among the most important are immortality, and, if the expression be allowed, individuality; properties by which a perpetual succession of many persons are considered as the same, and may act as a single individual.

In Welton v SaC ery [1897] AC 299 Lord Halsbury LC described a registered company as an ‘artiT -cial creature’, which must be dealt with ‘as an artiT cial creation’ (at p 305).

C ere has been considerable criticism of what is called the ‘T ction’ that the process of incorpor-ation creates a separate, artiT cial person.

One group of critics belongs to a long tradition of holding what may be called an ‘individualistic’ view, that only human beings can claim legal rights and obligations and have rights and duties aris-ing from legal relationships. As Max Radin put it, in ‘C e endless problem of corporate personality’ (1932) 32 Colum L Rev 643 at p 665:

C ere is always a danger of indirection and confusion when, for any purpose and even for a moment, lawyers or publicists lose sight of the fact that their fundamental units are human beings, nearly all human beings but nothing but human beings. C ese are persons in the proper sense of the term. Law exists for them to express their relations and subserve their needs. One of these needs is to speak of collectivities as though they too were persons. But an equal need is not to forget that they are not.

Jurists adopting this view suggest that a corporation should be regarded merely as a collective name for its members. C is is sometimes known as the ‘symbolist’ or ‘bracket’ theory of corporate personality because a corporation is seen as merely a symbol for, or brackets around, the names of its members. It is also known as the ‘aggregate theory’ of corporate personality because it regards a corporation as merely an aggregate of its members. Writers on jurisprudence who asserted this view include the German Rudolf von Jhering (1818–92) and the American Wesley N Hohfeld (1879–1918). For references to original German sources, see M Wol ̂, ‘On the nature of legal per-sons’ (1938) 54 LQR 494 at p 497, nn. 9 and 10. (Wol ̂ ’s article generally gives more detail on this and other criticisms of artiT cial separate personality.) Hohfeld’s views are discussed in the article by Radin cited above.

In recent times, there has been important individualist criticism of economics, social sciences and political theory, associated especially with the economist Friedrich von Hayek. C is criticism seeks to require society to be studied in terms of individual human beings and not as an entity in itself. C is has been called ‘methodological individualism’. See S Lukes, Individualism (Oxford: Basil Blackwell, 1973), especially Chapter 17.

C e individualistic view cannot be regarded as an accurate description of the common law the-ory of the corporation. It ignores the fact that the corporation is a useful legal concept precisely because it is regarded by common law both as a separate person and an association of its members. As Lord Sumner said in Gas Lighting Improvement Co Ltd v Commissioners of Inland Revenue [1923] AC 723 at p 741:

Between the investor, who participates as a shareholder, and the undertaking carried on, the law interposes another person, real though artiT cial, the company itself, and the business carried on is the business of that company, and the capital employed is its capital and not in either case the business or the capital of the share-holders . . . . the idea that [the company] is mere machinery for e ̂ecting the purposes of the share holders is a layman’s fallacy. It is a T gure of speech, which cannot alter the legal aspect.



C e relationship between the members of a company and the company as a separate person is the subject of a great deal of law. C e individualistic view does, however, serve as a reminder that the common law principle of legal personality is not without problems, which are manifested in the controversy over liP ing or piercing the veil (that is, ignoring the separate personality of a company), discussed in 5.3. Other problems are the extent to which a company, as a separate per-son, can be said to have interests (see 3.6.5.2, 16.6.4) or should have criminal liability (see 19.8), and the extent to which companies should be accorded human rights such as freedom of speech (see, for example, E L Richards, ‘C e jurisprudential sin of treating di ̂erents alike: emergence of full First Amendment protection for corporate speakers’ (1987) 17 Mem St U L Rev 173; C J Mayer, ‘Personalising the impersonal: corporations and the Bill of Rights’ (1990) 41 Hastings LJ 577), free-dom of religion (see 19.8.9) or the right not to give evidence incriminating oneself (see 19.9.3).

Another group of critics assert that an association of persons has a real personality which is merely recognised, and not created, by the process of incorporation. C is assertion is called the ‘realist’ theory or ‘natural-entity’ theory and is particularly associated with the German legal his-torian Otto von Gierke (1841–1921). C e realist theory of corporate personality is associated with opposition to the concession theory of incorporation. Supporters of the realist theory refer to the artiT cial-entity theory, rather scornfully, as the ‘T ction theory’, because they see it mainly as a denial of the reality of corporate personality.

C e best known exposition in English of Gierke’s work is by the legal historian Frederick Maitland (1850–1906); see F W Maitland, ‘Introduction’, in O Gierke, Political eories of the Middle Age, transl. F W Maitland (CambridgeUniversity Press, 1900), pp vii–xlv. Like many writers on corporate law theory, Gierke was interested in both legal theory and political theory. He was interested in the position of the corporation in the polity and also in the links between theories of corporations and theories of the State. For a detailed, if at times overheated, discussion of theories of the corporation and theories of the State, see F Hallis, Corporate Personality (Oxford University Press, 1930). C e development of these ideas in the Middle Ages is considered with a brilliant cascade of medievalistic scholarship in E H Kantorowicz, e King’s Two Bodies (Princeton University Press, 1957).

C e great di= culty for realists is to describe the personality which they ascribe to a corpor-ation. Is corporate personality comparable to human personality? Sometimes a body corporate is described in terms of a human body (see 19.8.3.2). Some commentators have seen the real per-sonality of a group of persons in terms of a group psyche—a mind and will created by the group. Maitland (op. cit., pp xxv–xxvi) said that Gierke’s theory:

. . . seems to say . . . our German Fellowship is no T ction, no symbol, no piece of the State’s machinery, no col-lective name for individuals, but a living organism and a real person, with body and members and a will of its own. Itself can will, itself can act; it wills and acts by the men who are its organs as a man wills and acts by brain, mouth and hand. It is not a T ctitious person; . . . it is a group-person, and its will is a group-will.

W M Geldart, ‘Legal personality’ (1911) 27 LQR 90 quoted the above passage, without the caution-ary T rst three words, and said (at p 93) that it stated the ‘essence’ of the realist theory and talked (at p 94) of ‘the reality of a group-personality’ which was to be investigated by political science, ethics, psychology and metaphysics. J A Mack, ‘Group personality—a footnote to Maitland’ (1952) 2 Philos Q 249, suggested that Maitland did not believe the theory of the group-person and the group-will, and that what Gierke meant by it ‘is not altogether clear’ (p 250, n. 6). Between Geldart’s expression of support for Gierke and Mack’s attempt to separate Maitland from Gierke, it had been said that Gierke’s views were used in Fascist political theory to justify the dictatorial Fascist State as an organism superior to the individuals of whom it is composed (see E Barker, ‘Introduction’, in O Gierke, Natural Law and the eory of Society 1550 to 1800, transl. E Barker (Cambridge University Press, 1934) at pp lxxxiv–lxxxvii; J D Lewis, e GenossenschaB - eory of Otto von Gierke (University of Wisconsin Studies in the Social Sciences and History, No. 25) (Madison, Wis: University of Wisconsin, 1935)).



As in the passage from Maitland quoted above, realists sometimes assert that a distinction should be drawn between a company acting by an agent and a company acting by an organ, and it is only with a realist conception of the corporation that it can be said to act by an organ (which is why the realist theory is sometimes called the ‘organic’ theory). English law does not, however, seem to make this distinction (see 14.4.5, 19.5.6 and 19.8.3.3).

C e idea of a company as an entity with its own personality and will has recently emerged again through applying the political philosophy of communitarianism to companies (see D J Morrissey, ‘Toward a new/old theory of corporate social responsibility’ (1989) 40 Syracuse L Rev 1005, espe-cially at pp 1033–6).

A more recent approach is to say that an entity’s real personality derives from the mere fact of its being referred to as a unit. C is is known as the ‘autopoietic’ (‘self-creating’) theory (see G Teubner, ‘Enterprise corporatism: new industrial policy and the “essence” of the legal person’ (1988) 36 Am J Comp Law 130 (reprinted in S Wheeler, A Reader on the Law of Business Enterprise (Oxford University Press, 1994))). C is approach can also be seen in the statement by F W Maitland, ‘. . . if n men unite themselves in an organised body, jurisprudence, unless it wishes to pulverise the group, must see n + 1 persons’ (‘Moral personality and legal personality’, in Collected Papers, H A L Fisher, (ed.) vol. 3 (Cambridge University Press, 1911), pp 304–20, at p 316). Maitland, giving the 1903 Sidgwick Lecture, was discussing a statement in the previous year’s lecture by Professor A V Dicey (1835–1922), ‘When a body of 20 or 2,000 or 200,000 men bind themselves together to act in a par-ticular way for some common purpose, they create a body which, by no T ction of law but from the very nature of things, di ̂ers from the individuals of whom it is constituted’ (A V Dicey, ‘C e com-bination laws as illustrating the relation between law and public opinion in England during the 19th century’ (1904) 16 Harv L Rev 511 at p 513). Dicey was discussing the personality of trade unions. In Bonsor v Musicians’ Union [1954] Ch 479, Denning LJ quoted Dicey to support his view that a trade union did have legal personality (the Trade Union and Labour Relations (Consolidation) Act 1992, s 10, now provides that it does not), and in Willis v Association of Universities of the British Commonwealth [1965] 1 QB 140, his Lordship held (again quoting Dicey) that a department of a company was ‘a separate entity’ (but then proceeded to T nd that this did not a ̂ect the case before him), claiming that his view in Bonsor v Musicians’ Union had been upheld by the House of Lords on appeal [1956] AC 104. In fact, as Mocatta J pointed out in Knight and Searle v Dove [1964] 2 QB 631 at p 635, the law lords in Bonsor v Musicians’ Union were divided on the question. For a full discussion of these cases, see K W Wedderburn, ‘Corporate personality and social policy: the problem of the quasi-corporation’ (1965) 28 MLR 62.

Realist critics would generally admit that the common law does not give full legal personality to entities that they think should have full legal personality, for example, partnerships and most unincorporated associations (though Scots law does confer full legal personality on partnerships: Partnership Act 1890, s 4(2)). It is also di= cult to accept that such entities as wholly owned subsid-iaries, shelf companies waiting to be bought, dormant companies and single-member companies have ‘real’ personality. Realist critics would say that this is the fault of the legal system, which ought to change its rules for conferring legal personality. C ey say that it is wrong for the legal system to confer personality on entities that do not have a ‘real’ personality while denying legal personality to entities that do have a real personality (see, for example, H J Laski, ‘C e personality of associ-ations’ (1916) 29 Harv L Rev 404). C e counter-argument of the artiT cial-entity theory is that it is better not to seek some characteristic of entities (such as being a group-person with a group-will) which justiT es them being granted legal personality, rather it should be leP to the legal system to decide which entities are to have legal personality (see J Dewey, ‘C e historic background of legal personality’ (1926) 35 Yale LJ 655; M Wol ̂, ‘On the nature of legal persons’ (1938) 54 LQR 494). H L A Hart, ‘DeT nition and theory in jurisprudence’ (1954) 70 LQR 37 took this counterargument further and suggested that it is misguided to search for the meaning of the legal concept of ‘corpor-ation’ in terms of what it is that the word by itself refers to, because, like many legal concepts, it



is a product of human thought rather than a description of some pre-existing entity. One should instead seek the meaning of the concept in the way in which it is used (this idea is also mentioned by Dewey, op. cit. at pp 660–1). It seems that Hart was making an essentially philosophical point about the nature of deT nition. For a more abstract analysis on the same lines, see J Wróblewski, ‘Legal person: legal language and reality’ (1982–83) 11/12 Quaderni Fiorentini per la Storia del Pensiero Giuridico Moderno 1035.

C e natural-entity (realist) and artiT cial-entity (T ction) theories produce two di ̂erent policies. In a realist legal system, all entities with ‘real personality’ would have legal personality, and entities without ‘real personality’ would not have legal personality. A T ctionist legal system grants legal personality simply on the basis of whether it is beneT cial to do so. It is clear that the English legal system is not realist. It does not grant legal personality to trade unions (Trade Union and Labour Relations (Consolidation) Act 1992, s 10) because trade unionists do not want it, though realists argued that trade unions do have real personality. It grants separate legal personality to wholly owned subsidiaries because of the commercial beneT ts of allowing them separate legal personality, though realists would argue that they do not have real personality. It grants separate legal personal-ity to single-member companies so as to enable individuals to trade with limited liability though realists would argue that a single-member company does not have a real personality separate from that of its member.

C e realist–T ctionist argument may be seen (especially in Maitland’s presentation) as a manifest-ation of the clash of world-views which pervaded much of 19th-century thought: the traditional view of cultured Europeans based on an admiring vision of Classical Greece and Rome against the newer, more nationalistic view based on a vision of a glorious medieval past. C e realist crit-ics asserted that the T ction theory was a theory of Roman law but the realist theory represented medieval German and English jurisprudence. C e discussion of realism and T ctionism in the late 19th and early 20th centuries was accompanied by vast amounts of history, but subsequent com-mentators have pointed out that there has been a search for a coherent theory of corporate per-sonality only in modern times, and that there is no evidence of what theory ancient or medieval lawyers held because they never considered the issue (see P W Du ̂, Personality in Roman Private Law (Cambridge University Press, 1938), Chapter 9; H Lubasz, ‘C e corporate borough in the late Year-Book period’ (1964) 80 LQR 228).

Some critics see the concept of the separate personality of a company as alienating people from their real conditions of existence by reifying social relationships. C e view of A A Berle Jr and G C Means in e Modern Corporation and Private Property (New York, 1932), at pp 66–7, was that:

C e spiritual values that formerly went with ownership have been separated from it. Physical property capable of being shaped by its owner could bring to him direct satisfaction apart from the income it yielded in more concrete form. It represented an extension of his own personality. With the corporate revolution, this quality has been lost to the property owner much as it has been lost to the worker through the Industrial revolution.

Later, at p 352, they quoted Walter Rathenau, In Days to Come, transl. E and C Paul (London, 1921), pp 120–1, writing of public companies:

No one is a permanent owner. C e composition of the thousandfold complex which functions as lord of the undertaking is in a state of c ux . . . . C is condition of things signiT es that ownership has been depersonal-ised . . . . C e depersonalisation of ownership simultaneously implies the objectiT cation of the thing owned. C e claims to ownership are subdivided in such a fashion, and are so mobile, that the enterprise assumes an independent life, as if it belonged to no one.

Critical studies of company law, enlarging on the points just made, may be found in K A Lahey and S W Salter, ‘Corporate law in legal theory and legal scholarship: from classicism to feminism’ (1985) 23 Osgoode Hall LJ 543; P Ireland, I Grigg-Spall and D Kelly, ‘C e conceptual foundations



of modern company law’ (1987) 14 J Law and Soc 149; and C Stanley, ‘Corporate personality and capitalist relations: a critical analysis of the artiT ce of company law’ (1988) 19 Cambrian Law Review 98.

5.4.3 economists and contractariansWhether or not it is accepted that the law deals adequately with the separate personality and the membership as two aspects of the company, it is said by some critics of the common law theory of corporate personality that it pays insu= cient attention to the business or other activity that the company pursues. C ese critics suggest that the law should have regard to the business enterprise rather than the individual company as a legal entity. C is theory of enterprise entity (see 5.3.12.2) seems to involve abandoning the concession theory of incorporation in favour of requiring courts to analyse in each case the economic structures they are asked to deal with and deciding for each of them where to allocate personality. C is would seem to be unworkable in practice.

Economists are usually interested in companies only in so far as they engage in economic activ-ity. Economists are not usually interested in dormant companies or shelf companies waiting to be bought. Economists are interested in economic actors regardless of their legal form. However, they are interested in the organisation of economic actors, especially where they are organised with systems of long-term relationships between factors of production—where, for example, investors put in permanent contributed capital, or the contracts of employment of employees last for longer than the production of a single item of output. C ese long-term relationships surprise economists who believe that factors of production would be more e= ciently allocated in a continuous market-place. R H Coase, ‘C e nature of the T rm’ (1937) 4 Economica NS 386 observed that not going to the marketplace for each and every particle of input saves on transaction costs. A A Alchian and H Demsetz, ‘Production, information costs, and economic organization’ (1972) 62 Am Econ Rev 777 focus on the necessity for teams of inputs (a multitude of investors to provide large amounts of capital; a team of employees to collaborate in making products) and deduce that the characteristic feature of an organised T rm is not so much long-term contracting but the management coordin-ation of teams of contractors. (O Hart, ‘An economist’s perspective on the theory of the T rm’ (1989) 89 Colum L Rev 1757 reviews these and other contributions and suggests that economists’ theories of the T rm have not yet got very far.) Economists who have concentrated on analysing organised T rms as alternatives to markets have described a T rm as a ‘nexus of contracts’, a catchphrase which seems to have originated with M C Jensen and W H Meckling, ‘C eory of the T rm: managerial behavior, agency costs and ownership structure’ (1976) 3 J Fin Econ 305, who talk, at pp 310–11, of ‘a nexus of contracting relationships’. C e phrase has been adopted by many in the law and econom-ics movement. If, as many in that movement believe, the law should not interfere with freedom of contract, the law should have little to do with a company which is only a ‘nexus of contracts’. As a public service, the State may promulgate a standard-form contract to save people the expense of working out their own contracts (for example, the Table A form of articles of association) but man-datory rules of company law are likely to be either superc uous or distortions of the free market. For expositions of the nexus of contracts view see F H Easterbrook and D R Fischel, ‘C e corporate contract’ (1989) 89 Colum L Rev 1416 and H N Butler, ‘C e contractual theory of the corporation’ (1989) 11 Geo Mason U L Rev 99. Writers adopting the nexus of contracts view are oP en called ‘contractarians’. C ey scarcely mention corporate personality, which is largely irrelevant to their policy programme. Easterbrook and Fischel, for example, in the article just cited, seem to regard a company as merely a symbol for the names of its members (see p 1426) as in the aggregate theory discussed at the beginning of 5.4.2. But in an earlier article, ‘Limited liability and the corporation’ (1985) 52 U Chi L Rev 89, they regard a company as a ‘set of contracts among managers, workers, and contributors of capital’, a view also taken in the economics literature by E F Fama, ‘Agency problems and the theory of the T rm’ (1980) 88 J Polit Econ 288 at p 289. Many adherents of the



nexus of contracts view see no need for the State to be involved in creating corporate personality and disapprove of the concession theory.

C e metaphor of the nexus of contracts neatly encapsulates the law and economics approach to company law, but it is the application of economic theory to law which is the distinctive feature of that approach not the application of contract law. As explained in 3.4, lawyers have long recog-nised a contractual analysis of companies but the practical application of contract law to company law has always been fraught with di= culty, partly because of contract law’s unfamiliarity with the process of renegotiation to adjust to changes of circumstances and partly because contract law is inappropriate for handling constitutional questions (again because they involve adjustments in long-term arrangements). One problem with the nexus of contracts metaphor is that a lawyer’s concept of contract is much narrower than an economist’s and it is sometimes di= cult to know whether people using the metaphor are talking only of legally enforceable contracts or of econom-ically signiT cant dealings generally.

Economists are interested in the contracts made with suppliers to a T rm of goods, labour, energy and services, and in the contracts made with customers of the T rm. Contractarian analysts of com-pany law, though, generally do not want anyone other than shareholders to be regarded as having a stake in a company and tend to ignore contracts with persons other than shareholders except as aspects of markets in which the company operates, though they do devote considerable time to analysing the relationship between shareholders and directors.

An important di= culty with applying the legal concept of a contract to the constitution of a company is, as pointed out in 3.4.1.2, that a constitution is only a framework of procedures for making decisions as and when decisions are required whereas a contract is traditionally thought of as a schedule of things to be done by the parties. Members of a company do not make a contract detailing what they and their company are to do: they enter into a relationship in which they expect to beneT t from whatever it is their company does do, as settled from time to time by themselves and the directors, and they agree on the form of that relationship as set out in the company’s constitu-tion. For a discussion of these problems see C A Riley, ‘Contracting out of company law: section 459 of the Companies Act 1985 and the role of the courts’ (1992) 55 MLR 782.

C e idea that a company is a nexus of contracts has been useful to the law and economics move-ment and has been useful for promoting the application of the idea of freedom of contract to company law but it is an inadequate description of the company unless the concept of contract is expanded to take in the constitutional relationships between a company and its members and between the members themselves.

For a large-scale review, with copious references, see the pair of articles by W W Bratton Jr, ‘C e new economic theory of the T rm: critical perspectives from history’ (1989) 41 Stan L Rev 1471 (reprinted in S Wheeler, A Reader on the Law of Business Enterprise (Oxford University Press, 1994)) and ‘C e “nexus of contracts” corporation: a critical appraisal’ (1989) 74 Cornell L Rev 407. R Flannigan, ‘C e economic structure of the T rm’ (1995) 33 Osgoode Hall LJ 105 observes that the primary purpose of a T rm is not to make contracts but to produce goods or services and that concentrating attention on the contracts a T rm makes may not help in the analysis of its internal structure. Flannigan’s article includes a valuable review of economic theories of the T rm. C ere is another very helpful review of theories in S Douma and H Schreuder, Economic Approaches to Organizations (Hemel Hempstead: Prentice Hall, 1991).

5.4.4 what influence does theory have?We have never come across an instance of a judge or legislator saying that a case was being decided in a particular way, or an enactment was worded in a particular way, so as to be in accordance with one theory of corporate personality rather than another. None of the theories can be regarded by a court as a source of law, since none has been stated legislatively or pronounced in a court judgment.



C e theories themselves are in fact very malleable and can rarely decide a point one way or another. C is is perhaps to be expected since the theories have come aP er company law itself and have all had to be capable of explaining existing company law in order to be taken seriously. However, as we have suggested in our comments, the theories are never complete explanations: none of them provides a base from which company law can be deduced. C e philosopher John Dewey (whose philosophy was founded on suspicion about the practical value of abstract theories) suggested that apparently conc icting theories of corporate personality had been used to serve the same ends, while one theory alone could be used to serve opposing ends (‘C e historic background of corporate legal personality’ (1926) 35 Yale LJ 655 at p 669). Nevertheless, the theories have always provoked great interest and are widely discussed. Some scholars have discerned the inc uence of one theory or another in cases or legislation but this is more a matter of identifying a sympathy for a theory than T nding a logical consequence of it. In an article dedicated to Gierke, F Pollock, ‘Has the common law received the T ction theory of corporations?’ in Essays in the Law (London: Macmillan, 1922), pp 151–79, concluded that the T ction theory was not part of the common law. D H Bonham and D A Soberman, ‘C e nature of corporate personality’ in Studies in Canadian Company Law, J S Ziegel (ed.) (Toronto: Butterworths, 1967), pp 3–32, found some evidence that courts in England and Canada have sometimes adopted a line of reasoning which coincides with one or other of the realist or T ctionist standpoints. D Millon, ‘C eories of the corporation’ [1990] Duke LJ 201 examines the history of corporate law in the USA. C ere is a very detailed examination of the inc uence of realist theory in England and the USA at the end of the 19th and beginning of the 20th centuries in M M Hager, ‘Bodies politic: the progressive history of organizational “real entity” theory’ (1989) 50 U Pitt L Rev 575; see also M J Horwitz, ‘Santa Clara revisited: the development of corporate theory’ (1985) 88 W Va L Rev 173. Both Hager and Horwitz claim to demonstrate that realist theory had a consistent inc uence, but their articles seem better to support the view of John Dewey that di ̂erent corporate theories could support similar arguments and the same theory could be used both for and against an argument. C e articles by Hager and Horwitz do, however, show the inaccuracy of the crude association of corporate law theories with political views given by J C Coates IV, ‘State takeover statutes and corporate theory: the revival of an old debate’ (1989) 64 NYU L Rev 806 at p 809, n. 18 (artiT cial-entity theory, liberal or leP ist; natural-entity theory, traditional conserva-tive; aggregate theory, neoconservative): the natural-entity theory was once the favourite of both the leP and the right.

5.5 company singular or plural?C e idea of treating an incorporated company as a person separate from its members rather than as an aggregate of its members is a simple legal device that has very considerable consequences, as shown in this chapter. One consequence is linguistic: ‘company’ is always construed as a singular noun—at least by writers on company law nowadays. Anyone reading cases decided before the First World War will notice that judges in those days always construed ‘company’ as a plural noun: the company was ‘they’ rather than ‘it’—linguistically, the judges seemed to have been thinking of a company as an aggregate of its members. C e point is illustrated by Prior v Sovereign Chicken Ltd [1984] 1 WLR 921, in which a building would have been entitled to exclusion from rating if it had been occupied by ‘persons’. It was occupied by a company so it was only occupied by one person, and in the circumstances the court held that in this instance the plural did not include the singular.

C e linguistics of talking about companies, and the implications for jurisprudential theories of company law, are discussed in S A Schane, ‘C e corporation is a person: the language of a legal T c-tion’ (1987) 61 Tul L Rev 563.


corporate personality - blackwell's · corporate personality lord halsbury lc said, at pp...

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